Read-Rite launches Scion fiber-optics biz, shares surge

Shares of Read-Rite Corp. (Nasdaq: RDRT) surged Thursday after the company formed fiber optics company Scion Photonics Inc. with $25 million in initial funding from Tyco Ventures and Integral Capital Partners.

In the conference call, officials said Scion should bring in about $100 million in revenue in calendar year 2001. Its largest competitors will be JDS Uniphase (Nasdaq: JDSU) and E-Tek, which was bought by JDS Uniphase. Products haven't begun shipping yet, but a few prototypes have been circulated. Scion expects to have revenue in the first calendar quarter of 2001.

Shares of Read-Rite were up 34 percent in early trading to 10.5. The stock had volleyed to new highs throughout the summer as the company announced that several disk-drive manufacturers will use its recording heads.

The move will position Read-Rite, currently a maker of magnetic recording heads, in the hot new industry of fiber optics. Scion Photonics will design, manufacture and market high-performance optical components to the fiber optics communications market.

In a conference call Thursday morning, president and CEO Alan S. Lowe said the company had three objectives in creating Scion as a separate entity; it can leverage Read-Rite's infrastructure, enter the public market, "at an attractive time," and attract expertise with a stock-option plan.

Investment in small fiber optic companies, such as Corvis (Nasdaq: CORV), which made a big splash on the IPO market, has been seen as a win-win situation; the market is exploding, and big players such as Nortel (NYSE: NT), Cisco (Nasdaq: CSCO) and Lucent (NYSE: LU) have been hungry for acquisitions.

Scion will act as a separate company yet will have access to the resources and manufacturing infrastructure of Read-Rite. Read-Rite's tape business will become a tenant of Scion's in its wafer fabrication facility in Milpitas, California.

Read-Rite said its know-how and experience in thin-film technology and materials science will be a major differentiator for Scion in the marketplace. The company also said it sees an opportunity to reduce the cost of these products and increase the yields as the optical components industry becomes more cost competitive.

Tyco Ventures, the venture capital unit of Tyco International Ltd. said that in addition to its $15 million investment in Scion, it has also invested $15 million in Read-Rite through a private placement.

Read-Rite also said it was in talks with other interested parties for technology and capital investments in Scion; but it is interested more in "partners to help us learn and get into volume faser," than it is in additional cash, Lowe said.