See also Optical Keyhole's comments on the merger.

Interview with Philippe Bregi, Chief Operating Officer of Alcatel Optronics.

Would this be called a merger or a takeover?

I consider it more as a merger than a takeover. From a legal viewpoint it is an acquisition, but from a more practical viewpoint it is a combination. I say this because the idea is to be a powerful leader in the opto components field. Clearly when you look at the scope of customers, the scope of technologies and the scope of products, this is unsurpassed and shows more complementarities than overlaps.

Do you think it was part of Avanex's goal to be "another JDSU", or was this an opportunistic play because valuations are currently cheap?

From the Alcatel point of view, the deal is seen not as a divestiture of Alcatel Optronics but as its leverage to create a world leader in optical components. This is a strategic and industrial deal, and not just an opportunistic one. Therefore, for Alcatel, this is clearly a partnership. In the new entity, Alcatel retains a share of 28%, Corning will have 17% and Avanex will have 55%.

Has Alcatel committed to buy a certain level of components from this new enlarged entity?

In this transaction, Alcatel has signed a supply agreement for 3 years. This agreement will give Avanex a significant guaranteed market share.

Is this supply agreement at all flexible? - what is the real level Alcatel has committed to?

Alcatel and Avanex have preferred to express the supply agreement in terms of a percentage of the aggregate Alcatel requirement. This will give more flexibility than an agreement expressed in dollar terms.

Is there any sense that this merger is just the beginning, given that the industry is still awash with financially shaky optical component suppliers?

From a product viewpoint, this enlarged entity will own one of the largest portfolios available on the market. Moreover, we will start with a lot of cash - over $250 million - so there will be opportunities to increase our participation in some product lines or market segments where the enlarged entity is not as strong as some competitors.

Also as Avanex is a listed entity, it will also be able to make acquisitions in shares. But at the moment, there is no firm plan to do any more acquisitions because the current range of products is surpassed by no one. However, it is clear that this enlarged entity will have the possibility to take opportunities that neither Avanex, Corning nor Alcatel Optronics alone could have taken on their own.

Why is Alcatel taking a share in this enlarged entity? If it wanted to get out of the components business, why did it not get out completely?

Basically because Alcatel thinks this could be a very good business some time in the future. Alcatel does not regard components as a core business, such as it was 10 or 25 years ago, when there were very few suppliers. From a strategy viewpoint, Alcatel has decided to go up in the chain and position itself more as a solution provider. But it is clear that Alcatel believes that from a business view point, it will enjoy more value in say three years from now than it does today.

On the product mix of this enlarged entity, are there any current gaps?

There is nothing that we "need", but we are stronger in pure Long Haul and Metro than in Access. A lot of our competitors have the same focus as us, but we cannot ignore the fact that there is some Access and Datacom business that is not our major strength today.

Will some of the $250 million cash be ploughed back into in-house development to fill those gaps?

The cash will of course, be used for everything, but substantially to make sure we pass through the "difficult" years. The major purpose of this cash will be to make sure that in 2 years from now we will still be here when a lot of others will have disappeared, just due to cash burn. Clearly the new Avanex will have somewhere between 8 or 10 quarters at current burn rate.

How was the deal structured between Alcatel and the old Avanex - what money changed hands and for what purpose?

Alcatel contributed $110 million (finalised at closing) in cash. This relates to some restructuring, which has to be performed by the enlarged entity, and not by Alcatel. Corning is expected to contribute about $20 million in cash. Alcatel and Corning will also assign about 1,400 patents to the enlarged entity.

The new entity will not be perceived as an Alcatel subsidiary as no Alcatel people will sit on the board, though one Corning person will join the Avanex board.

Does this restructuring involve job layoffs?

Yes. At the moment combined we have approximately 1,600 people. By the end of the year, a target of 1000 people is more reasonable. All three entities will contribute to the headcount reduction, but a significant portion will come from Alcatel, essentially with the closing of the Lannion plant. In any case, Alcatel Optronics had already planned to reduce its headcount from 1000 at the start of 2003 to less than 500 by the end of this year.

Will any manufacturing continue to take place in France?

Yes. France will be the centre of manufacturing for all the InP and GaAs chips and for the lasers, detectors and pumps.

What will happen to the Lasertron part?

It will be shut down. The new entity will have a total of 5 locations: Fremont, the former Avanex, in charge mainly of thin film passives and reconfigurable OADMs; two former Corning sites, New York dealing with optical fibre amplifiers and dispersion compensation modules, and Milan, the former Pirelli plant, which deals with LiNb modulators; while the former Alcatel Optronics will retain Nozay and the Livingston, Scotland site, formerly Kymata. Livingston will be doing the FBGs, AWGs and planar integration.

Who actually instigated this agreement? Was Avanex looking for acquisitions or was Alcatel seeking a partnership?

Alcatel and Corning were jointly looking for a partner - we knew that we had complimentary products and synergies. The search was managed jointly.

What about the management structure of this enlarged entity?

Walter Alessandrini will continue to be Chairman and CEO of the enlarged entity, but he wants to review different alternatives during the next three weeks, before announcing a more detailed organisation.

Is there likely to be any resistance if French management is significantly kept out of this enlarged entity?

The Alcatel Optronics management, already an international one, is committed to the success of this transaction.

Will the enlarged entity keep submarine components?

Of course, as submarine components are very profitable and difficult to develop, the new entity will maintain these products within its portfolio. We will be one of the very few companies having the knowledge to make these components.

Where are the main areas of product overlap between the three companies?

Firstly, the pump business - both Corning Lasertron and Alcatel Nozay are in this market. The choice is clearly to continue this business in Nozay, for at least one simple reason - Nozay supplies both pumps and lasers whereas Corning Lasertron just supplies pumps. You cannot close the Nozay front end, otherwise you lose the lasers.

The second area of overlap is optical fibre amplifiers - both Alcatel and Corning develop and manufacture them. Nozay will probably keep some kind of development activity in order to benefit from its proximity with Alcatel's systems group, but the product line will be based in Corning, New York.

Thirdly, there are the passive product lines, which are a little more difficult since all three companies supply them but with different technologies. So rationalisation will take place while attempting to use the best technology for the best of each product. In concrete terms it is unlikely that Alcatel Optronics UK (Livingston) will continue to produce multiplexers for 8 channel when it is less expensive to do it in Thin Film, and Avanex will not continue 40 channel multiplexers in Thin Film, when it is less expensive to do it in AWG.

As Alcatel still owns a sizeable chunk of this enlarged entity, do you think that even now there is likely to be some resistance or reluctance from other systems vendors buying from the new entity, such as Alcatel Optronics has suffered for some time?

This was clearly a major problem that we never overcame. A lot of customers tell us that our products are very good, but they cannot buy them because you are ALCATEL Optronics! From this viewpoint, even our attempt to use the tracking stock to distance ourselves was not a success. The tracking stock was not enough to guarantee our independence in the eyes of some potential customers.

Now, even Alcatel's 28% share will not interfere with the business decisions of Avanex. So I would hope that this enlarged entity will sell a lot of our lasers to many people not buying these lasers today.

However, even if we have not been able in the past to convince some key U.S. customers to enter into discussion with us, we were very successful on a lot of fronts, particularly in China There is an excellent fit between us and our partners in terms of customers where we are strong.

We were particularly strong in Huawei and ZTE in China and CIENA in the U.S. - customers that were not particular strengths of either the old Avanex or Corning. Corning, for example, was strong with Lucent, and Avanex with Cisco, two major players Alcatel Optronics never sold to. So we have a very complimentary sales force between the three of us.

As an interesting aside to this interview, it is worth noting that it was conducted against the backdrop of a massive strike in Paris - no trains, no planes, no buses and just one metro line working - the automatic one. Optical Keyhole was assured, however, that this was a coincidence, and had nothing whatsoever to do with the tri-merger!