Top suppliers have also reported soaring sales revenue, partly due to strong demand for fiber lasers.

Silicon Valley photonics giant Lumentum revealed its plan to acquire rival NeoPhotonics.

The proposed all-cash transaction value NeoPhotonics at US$918 million and will promote the issuance of Lumentum in the entire optical communications field.

Although the acquisition has been approved by the boards of directors of the two companies, the acquisition still requires shareholder and regulatory approval. Assuming everything goes according to plan, it is expected to be completed in the second half of 2022.

Both companies have important operations in China, which means that the transaction needs to be approved by the relevant Chinese authorities.

Exciting news! @Lumentum has agreed to acquire @NeoPhotonics_Tw to accelerate the speed and scalability of optical networks. Read more in the press release below, including forward-looking statements and solicited information: https://t.co/AlagJQx7Gb pic.twitter.com/zMGETETgE38

Reasons for the merger Alan Lowe, CEO of Lumentum, commenting on the rationale behind the proposal, stated that customer feedback on the proposed merger was positive, adding:

"At a time when photonics is at the forefront of favorable long-term market trends, we are making another important investment through NeoPhotonics to better serve our customers and expand our photonics capabilities."

Lowe’s colleague Tim Jenks at NeoPhotonics commented: “Today’s announcement is an exciting milestone for NeoPhotonics. The global demand for our ultra-pure optical tunable lasers and photonics technology for long-distance speed applications is greater than ever. It’s more obvious at any time, and Lumentum is the ideal partner to provide our customers with services on a larger scale."

Jenks said that the two companies provide complementary product portfolios, and the combined entity will benefit from the expansion of scale, the breadth of customer application knowledge and R&D capabilities.

A few months ago, Lumentum acquired Coherent, a similar laser company, for US$7 billion and was finally usurped by II-VI. The transaction is expected to be completed by the end of this year.

With its latest move, Lumentum seems to be doubling down on opportunities in the field of optical communications, rather than pursuing the broader diversification strategy implied by relevant company acquisition offers.

Photonics: a key enabler (click to enlarge)

Complementary product lines In the investor presentations of Lumentum and NeoPhotonics, the two companies emphasized the complementarity of their product lines.

NeoPhotonics is fully focused on photonic components for cloud computing and optical network applications, selling external cavity tunable lasers, silicon photonic components and transceivers, high-speed coherent modules, and a series of passive components and RF driver chips.

Lumentum is more diversified, with cloud and web applications accounting for about 60% of its sales. Its main product lines include reconfigurable optical add/drop multiplexers (ROADM) and components and modules based on indium phosphide (InP) integrated circuits.

The remaining 40% of Lumentum's sales come mostly from 3D sensing and lidar applications, as well as fiber lasers for material processing.

Lowe and Jenks believe that the total potential market for these combined product lines is approximately US$20 billion. As bandwidth requirements continue to grow, the market for components and modules running at 400 Gb/s and faster is expected to grow rapidly.

NeoPhotonics also recently revealed that it has developed a new 1550 nm InP laser designed to seize the new opportunity of frequency modulated continuous wave (FMCW) lidar, which can complement Lumentum's use of VCSEL and other edge-emitting laser diodes for 3D sensing Such expertise as traditional lidar technology.

Lumentum fiber laser sales rebound In addition to the details of the merger plan, Lumentum and NeoPhotonics both announced the results of the most recent financial quarter.

Lumentum's sales for the three months ended October 2 were $448 million, which was beyond the company's earlier forecast—despite the persistence of chip shortages—in part because of the sharp increase in sales of commercial lasers for non-communication applications.

The revenue of the commercial laser division was US$42.4 million, a year-on-year increase of nearly 80%. Mainly attributable to the demand for high-power fiber lasers, this growth subtly offset the 5% year-on-year decline in Lumentum's larger optical communications division, which had sales of US$406 million.

But the facts have proved that the sales of 3D sensing applications are also higher than expected. With the increase in profit margins, the overall impact on the bottom line is 100 million US dollars in pre-tax revenue this quarter, which is higher than 84 million US dollars a year ago.

At the same time, NeoPhotonics, which is also struggling with supply chain shortages, reported quarterly sales of $84 million. This represents a sharp rise in the June quarter, but it is down 18% from the same period last year.

However, the bottom line looks better, NeoPhotonics reduced its pre-tax loss to $1.4 million from $6 million a year ago.