Today's decline in JDS Uniphase (Nasdaq: JDSU) following its announcement of the SDL (Nasdaq: SDLI) acquisition inevitably causes someone to ask: what's wrong with the deal?
Not much, as far as I can tell. Most shareholders seem to agree with me.
The 11 percent decline in JDS Uniphase's market cap actually seems like a sign of optimism, because it's less than you'd normally expect from a deal that calls for the company to issue more than 328 million shares. That's an increase of more than 26 percent in JDS Uniphase's current shares outstanding. And it doesn't include SDL options that must be accounted for when the deal closes.
So the decline looks mild when you consider the dilution required to buy SDL. Besides, this is JDS Uniphase we're talking about; most of its shareholders are accustomed to large acquisitions by now. They expect them and probably demand them.
But Wall Street's ongoing interest in optical component firms makes me wonder how many people truly heed the oft-quoted maxim of Invest In What You Know.
Theoretically, it's easy enough to sum up these businesses: they make devices for fiber optic networks. But that's like saying Archer-Daniels-Midland (NYSE: ADM) produces stuff you eat. There's a lot more to it.
JDS Uniphase divides is product line into at least seven categories: amplifiers; transmission; interconnect products; commercial lasers; instruments; switching and network control; and dense wavelength division multiplexing, probably the area that draws the most Wall Street attention.
And how many shareholders of JDS Uniphase can define DWDM and describe it? You think your average JDSU investor can explain the difference between active components like pump lasers and passive ones like switch matrices? Can the average fund manager explain the intricacies of SDL's industrial laser business? Don't bet on it.
Yet those investors have largely been the foundation for the Wall Street success not only of JDS Uniphase but of all major technology companies. Despite Wall Street's recent uncertainties, JDSU, SDL and other cutting-edge technology names remain far (far, far, far) ahead of their levels from a year ago. One of my long-time faves, Corning (NYSE: GLW), has run up in recent years largely because of its expansion beyond the basic fiber business, to move into the market for optical network parts.
(And GLW has taken a nosedive today because most outside observers expected Corning, rather than JDS, to buy SDL. Especially since Corning seemed to need it more.)
Traditional investing gurus would tell you to stay out of these fields, because they're nearly impossible to understand unless you happen to be in them. Many executives of fiber-optic bandwidth suppliers, let alone outsiders, would be hard-pressed to explain all the parts that go into the networks they're building.
But if they're competent, they understand the economics of their networks. They know how much it costs to build, maintain and market their product. Investors can acquire the same understanding, assuming companies report their data accurately.
Even with the stock market's breather of the last few months, certain technology fields remain the best venue for growth in the future. You have to take part in it if you want to get any kind of acceptable return.
There's the great difficulty of the the modern stock market. Invest In What You Know is a great idea, but if you cling to it blindly, you'll miss out on the most powerful sectors of the economy.
Sticking to the maxim can also directly hurt.
Among the so-called New Economy stocks, the easiest ones to understand are the Web content and e-tailing businesses, because those are the ones we directly use as consumers. Unfortunately, most of these Internet businesses stink. Many millions, perhaps billions, have been wasted on these bad companies.
Maybe you "know" the business and love it. But that knowledge is worthless without an understanding of the larger dynamics around it. You might love buying CDs from a certain website, but if you have to understand that margins are non-existent, competition gets fiercer all the time and the CD business as a whole is threatened.
Invest In What You Know makes perfect sense. But it's not enough -- ultimately, you have to Invest In Economics That You Know.
You might never know how to build an optical network, but you can find out that others are building them at a rapid pace likely to continue for years, because the world demands the bandwidth. You can find out that JDS Uniphase has acquired its way to market leadership. And you can find out that its position is becoming more entrenched with every deal.
Then it's just a question of a buying in at a fair price. At least until aggressive antitrust regulators step in. If they do. 22GO>