Strategic buyouts and SPACs dominate industry consolidation

Photonics sector transactions hit $85 billion in 2021, thanks to some high-profile mergers and listings fueled by private equity. With thousands of participants, most of them SMEs, the push and pull of industry fragmentation and consolidation is a perennial topic of interest in the photonics business. And with 2021 characterized by a number of high-profile merger deals — most obviously the protracted battle to acquire Coherent, one of SPIE Photonics West’s largest exhibitors — you could be forgiven for thinking that last year represented a record level of activity. In fact, that’s not quite the case: the latest annual compilation of photonics business transactions by industry analyst Linda Smith of advisory firm Ceres shows that deals in 2021 totaled $85 billion — just short of the $87 billion figure registered in 2019.

“2021 marks the highest total transaction value in history for mergers and acquisitions (M&A), [with] global aggregate M&A transaction value up more than 40% over 2019,” wrote Smith in the latest round-up. “However, the total transaction value for targets employing photonics technologies is still shy of its 2019 high.”

Smith suggests that this discrepancy may be due to an inherently high concentration of strategic deals in the photonics sector, where more than 80% of acquisitions of photonics-enabled targets involved strategic buyers. That contrasts with wider industry: according to management consultants Bain & Company, although strategic M&A activity overall looked set to reach its highest value in six years, it is private equity investment that increasingly dominates the scene.

“Strategic buyers [face] the challenges of slower growth, an abundance of investment capital, advances in digital and mobile technologies, and government intervention with M&A,” wrote Smith. “They acquire companies to open new markets, enhance capabilities and implement new business models. We also see more strategic buyers executing vertical integration plays, bringing critical capabilities inhouse.

Industry analyst Linda Smith of advisory firm Ceres. Credit: Ceres

In 2021, however, M&A appears to shift back from ‘capability’ deals to ‘scale’ deals, as companies seek to strengthen their core business.” In 2021, a few of those deals stood out, because they involved some of the biggest and best-known brands in the photonics sector — names that would be very familiar to anybody who has visited the Photonics West exhibition in the past few decades.

Last year opened with a flurry as defense-aligned Teledyne Technologies announced plans on January 5 to acquire the thermal imaging giant FLIR Systems for $7.5 billion. Just two weeks later, Lumentum and Coherent revealed their $5.7 billion merger deal. The latter was not to be, however: following a succession of rival bids that turned the sale into an auction, II-VI emerged as the successful bidder with its tabled $7 billion agreement — supported with $2 billion from Bain Capital.

Lumentum’s powder did not remain dry for too long, although the near-$1 billion agreement to acquire NeoPhotonics announced in November is significantly smaller than the industry-spanning scope envisaged with its original Coherent plan.

Consolidation trend 

So what is driving the push to consolidate? An “investment thesis” presentation document from Bain Capital, in relation to the II-VI/Coherent deal, offers an insight. With combined annual revenues in the region of $4.1 billion, the merged entity would eclipse by some distance the sales of MKS Instruments, Lumentum, and IPG Photonics, elevating II-VI to a size more comparable with leading industrial technology firms such as Agilent, Rockwell Automation, or Teledyne — a scale that has not previously been achieved by a “pure-play” photonics company. Bain believes that the increase in scale and technology scope will catapult II-VI/Coherent into a new bracket — one where stock prices typically command a higher multiple to earnings.

Looking at some of the other agreements signed in 2021, Smith notes as stand-out developments network testing firm Viavi Solutions’ $480 million acquisition of rival Exfo, and Jenoptik’s $350 million deal to buy the medical and Swiss Optic divisions of Berliner Glas from semiconductor equipment giant ASML.

Of course, the tentacles of photonics technology spread across all sorts of vertical markets. In life sciences, Smith cites Thermo Fisher Scientific as one the most acquisitive — last year the NYSE-listed firm added four life sciences instrumentation companies and a rapid point-of-care PCR-based testing platform for detecting infectious diseases.

In fact, Smith reports that biophotonics saw more merger activity than any other last year, including deals that saw Quoin Pharmaceuticals merge with time-resolved microscopy firm Cellect Biotechnology to target regenerative medicine, Diasorin buy out optical microfluidics specialist Luminex, and Boston Scientific acquire surgical laser pioneer Lumenis for $1.1 billion.

Aurora was one of several lidar firms to raise money via a special-purpose acquisitions company (SPAC) merger deal in 2021. Outside lidar, Rockley Photonics and genomic sequencing equipment firm Quantum-Si have also used SPACs for fundraising. Credit: Aurora

The year 2021 also saw private equity fuel the value of special-purpose acquisition company (SPAC) deals to new heights. In the photonics industry this trend has been largely restricted to the lidar sector, where SPAC listings by Aurora, Velodyne, Luminar Technologies, Ouster, Aeva, Innoviz, and AEye will soon be joined by Quanergy Systems.

The exceptions are Rockley Photonics and Quantum-Si. Rockley’s founder Andrew Rickman enjoyed success in the late 1990s with the flotation of Bookham Technology, and his latest silicon photonics company pivoted from communications to healthcare prior to completing its SPAC deal. Proteomics equipment firm Quantum-Si put its publicly raised capital to work quickly, securing its supply chain and support for scaling commercialization efforts with the acquisition of semiconductor and optoelectronic assembly services provider Majelac Technologies.

Elsewhere, Amphenol Corporation, BICO Group (previously Cellink) and Desktop Metal have all made their presence felt, with moves to snap up fiber-optic interconnect maker Halo Technology Group, precision lithography equipment firm Nanoscribe, and additive manufacturing system vendor ExOne, respectively.

Speaking of snapping up, Snap Inc., the software company behind Snapchat, has made a move into optical hardware with the acquisition of WaveOptics, the UK maker of augmented reality (AR) waveguides based on diffractive optics (and a regular participant at SPIE’s AR/VR/MR event). Summing up the current landscape, Smith observes that although photonics technology deals may not be keeping pace with the wider market for mergers and acquisitions, the strategic activity now being witnessed is significant. “Strategic buyers have the advantage over financial sponsors, such as private equity, in that they can create proprietary deal flow,” Smith writes. “However, most M&A deals today are auction processes with stiff competition from financial sponsors, who have more deal-making capability and capacity than strategic buyers — as well as $2.8 trillion of dry powder.”

If financial sponsors do become more attracted to photonics deals in the future, then M&A activity in the sector will likely increase in line with the wider market. “To compete, successful strategic buyers will have to expand their M&A capabilities, and/or instead consider partnerships such as joint ventures or corporate venture capital to expand capabilities and address challenges in talent retention and supply chain,” Smith concludes.

Mike Hatcher is editor of optics.org. A version of this article appeared in the 2022 Photonics West Show Daily.