This Laser Battle Has Sparked a Rebellion

Lumentum,

MKS Instruments


MKSI 2.36%

and

II-VI


IIVI -1.56%

have at least two things in common. All three companies really, really want to acquire Coherent and all of them have a sizable base of shareholders who don’t seem hot on the idea.

The three-way bidding war for

Coherent

picked up significantly last week. The maker of laser components used in OLED displays, semiconductor manufacturing and other applications started the week by declaring the latest bid from II-VI (pronounced two-six) superior to the others. That bid valued Coherent at around $252 a share with a much richer cash component than previous offers—including a freshly revised one from MKS. On Wednesday, Coherent announced a new deal with original suitor Lumentum, which boosted the cash portion of its own offer and offered a total value of around $262.

Lumentum’s latest offer for Coherent amounts to a cash commitment of about 2.5 times its last reported balance.



Photo:

Kris Tripplaar/Sipa USA/Reuters

II-VI then swooped in Friday with its third proposal, adding even more cash and valuing Coherent around $272 a share. Coherent proclaimed that bid as superior and gave Lumentum until the end of the day this Wednesday—St. Patrick’s Day—to come up with a bigger pot of gold.

Sweetening cash-stock offers with extra green is hardly uncommon in competitive bidding situations. But Lumentum and II-VI especially also had little choice, given what seems a revolt by their own shareholders against a bidding war that now values Coherent around 40 or 41 times forward earnings—the company’s highest multiple in more than a decade, according to FactSet. Lumentum’s stock price fell 19% between Jan. 19, when the first deal was announced, and March 10, when Coherent announced it accepted the company’s revised bid. II-VI’s stock slid 23% between the date of its first bid on Feb. 12 and its latest offer on Friday.

Those declines forced both companies to crack open their wallets. The cash portion of Lumentum’s bid went from $100 a share to $175 a share—a 75% jump that only boosted the total deal value by 16%. II-VI ratcheted its cash portion from $130 a share to $170 to its latest revision of $195. That amounts to about $4.76 billion in cash—nearly six times its last reported cash balance.

Lumentum’s latest offer amounts to a cash commitment of only about 2.5 times its last reported balance. But analyst

Christopher Rolland

of Susquehanna estimates that winning the deal would leave both Lumentum and II-VI with similar net debt-to-adjusted earnings before interest, taxes depreciation and amortization levels of around 3.9 times—a level he described as “likely approaching the cusp of their risk tolerance levels.” Many of their investors seem to have passed that already.

Write to Dan Gallagher at [email protected]

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