Stefan Rettenberger

As such, the merger promises to double their size and networking skills. Yet the stock market appeared underwhelmed by the announcement, with ADTRAN’s shares down 16% for the rest of the week after the deal was announced.

Market research analysts, however, are more upbeat.

“ADTRAN and ADVA have a better path forward together than separately,” said John Lively, principal analyst at LightCounting Market Research, in a research note.

The deal is expected to close in the second or third quarter of 2022 but only after several hurdles are overcome in what is described as a complex deal.

Motivation

The two companies describe the merger as a logical outcome given recent developments in the marketplace.

“Our combination will make us one of the largest Western suppliers for the markets we serve,” said Tom Stanton, CEO and chairman of ADTRAN, on the call announcing the deal. The word “Western” is noteworthy, reflecting how geopolitics is one catalyst motivating the merger.

The deal will also reposition the two companies with their rivals. ADTRAN will distance itself from broadband competitors such as Calix while ADVA will diversify its business from its current larger competitors, Ciena and Infinera. The new company’s revenues will also approach those of the two players.

The product portfolios of ADTRAN and ADVA have almost no overlap. ADTRAN offers fibre access and connectivity solutions while ADVA addresses metro WDM, data centre interconnect, business Ethernet, network synchronisation and network functions virtualisation (NFV) expertise.

Once combined, each company will seek to expand its sales in the other’s main market.

The US accounts for 74 per cent of ADTRAN’s revenues, while Europe accounts for 21 per cent. Meanwhile, Europe accounts for 62 per cent of ADVA’s business while the US is 29 per cent. The remaining revenues come from the Asia Pacific: ADTRAN, 5 per cent, and ADVA, 9 per cent.

Also cited as a factor is the wave of investment in fibre, not just by communications service providers (CSPs) and public utilities but also government-backed stimulus plans in the US and Europe.

In the US, $66 billion in investment was mentioned spread across programmes such as the infrastructure bill, the second phase of the Rural Digital Opportunity Fund (RDOF), and state-level funding for high-speed broadband.

In Europe, the sum is similar: $35 billion in government funding for high-speed broadband in the European Union, and $30 billion in public and private funding for fibre builds in the UK alone.

“There is an ongoing global fibre investment opportunity that we believe will create sustained momentum for years to come,” said Stanton.

Moreover, having access and second-mile technologies, the new company can better win business. “There is not a customer that we sell to today that, when they are upgrading their access infrastructure, is not also upgrading their middle-mile,” said Stanton.

Becoming a larger player will help, he said: “We see our customers making a significant capital investment to transition their supply chain to trusted vendors.”

Another merger catalyst is the opportunity created by US and European service providers that no longer use Chinese vendors and in some cases are replacing equipment already deployed.

In the US, this is less of an issue due to the fewer deployments while in Europe the process started 18 months ago. Stanton expects Latin America to follow.

“The market opportunity is not just created by all the stimulus but it is also because of the displacement of Eastern vendors,” said Stanton.

There is a land grab going on, he says, and the company that gets there first wins.

“Once you get entrenched in a carrier, regardless of size – the larger ones tend to have two [vendors] and the smaller ones, one – once you are entrenched, it is very difficult to get pulled out,” said Stanton.

Analysis

LightCounting’s view of the merger is positive.

Lively says the merger will not reshape the optical networking industry but it will be attractive to Tier 2 and Tier 3 CSPs that want to buy access and aggregation equipment from a single supplier.

LightCounting notes that the deal values ADVA at $931 million, 1.3x its most recent four quarters of sales.

This is a relatively low valuation: the 2015 Infinera-Transmode merger was 2.6x while the Cisco-Acacia Communications deal, which closed earlier this year, was 7.7x. Of recent deals, only the 2020 Ribbon-ECI Telecom deal was lower, at 1.2x.

LightCounting says one reason for the lower valuation could be ADVA’s port shipments; the vendor is one of the smallest dense WDM suppliers.

The merger’s impact will mostly be felt by the competitors of the existing two companies, says Lively. The new ADTRAN’s sales will be 20 per cent greater than Infinera but still a third of the size of Fiberhome and Ciena.

The importance of size is something both companies stress.

“Our industry has been consolidating and there is an underlying notion that scale matters,” says Stephan Rettenberger, senior vice president, marketing and investor relations at ADVA.

Doubling in size, the new company will be in the same bracket as Infinera while Ciena will be about 3x its size, notes Rettenberger: “The companies that we used to worry about the most are not as distant as before.”

At first glance, the merger between a US and an European company raises questions about the integration challenge. But both firms have American CEOs and both have operations in the US and Germany.

ADTRAN acquired Nokia Siemens Networks’ fixed-line broadband access unit in 2011 while ADVA more recently acquired US firms, MRV Communications and Overture.

Brian Protiva, CEO of ADVA and a co-founder of the company in 1994, is the longest-serving CEO in the optical industry. As such he will have thought long and hard about the deal.

“This business combination is not only about growing the business,” says Protiva. “These two businesses fit perfectly together to address existing market and technology requirements, and we are well-positioned to lead the transition to access and edge convergence.”

Service providers do not need separate infrastructure for business services, residential broadband, and/ or 5G xHauling, he says.

Mechanics

The proposed deal is an all-stock one with ADTRAN and ADVA combining to form ADTRAN Holdings.

Each ADVA share will be swapped for 0.8244 shares of the new company while ADTRAN shares will be exchanged on a one-for-one basis. ADTRAN shareholders will own 54 per cent of the combined company while ADVA shareholders will own 46 per cent, assuming all of the ADVA shares are swapped.

But the new holding company must first be approved by German regulators, expected to occur by November. A three-month offer period then starts during which a minimum of 70 per cent of ADVA shares must be surrendered.

Stanton will continue as CEO and chairman at the new company while ADVA’s Protiva will join as executive vice chairman.

“I’m convinced that Tom is the right person to run the combined company,” says Protiva. “He executes to plan, is well-liked by customers, and thinks very similarly to our ADVA leadership around people first and the customer experience.” Stanton is also a long-serving CEO, heading ADTRAN since 2005.

Protiva will support Stanton during the integration period and then be involved in the corporate strategic direction of ADTRAN, as a board member, using his many long-term relationships in the combined markets.

After that, Protiva says he may return to Egora, a holding company out of which ADVA was born.

ADVA’s CTO, Christoph Glingener, will retain his role with the new company. ADTRAN and ADVA will have a combined annual R&D budget of $250 million.

”The stock exchange offer needs to pass all types of regulatory groups and needs to be accepted by the ADTRAN and ADVA shareholders,” stresses Rettenberger. “There is still a long path to closing.”