Mergers and acquisitions: good for photonics?

Industry:    June, 2016

Several high profile acquisitions have been made in the last few months in the photonics sector. Thierry Robin and Jacques Cochard, from market research firm Tematys, discuss the impact of mergers and acquisitions on the photonics industry

With the announcement of several major deals since the beginning of the year – for example, Coherent purchasing Rofin, or Newport being bought by MKS Instruments – it appears that mergers and acquisitions (M&A) are rapidly increasing in photonics. Is it really true? And what does it mean for the photonics industry?

M&A are transactions in which the ownership of companies or their operating units are transferred or combined. Tech companies in general represent about one third of all publicly traded firms, but increasingly dominate M&A transactions, with tech acquisitions now representing more than 60 per cent of all deals. What about photonics?

Big deals in global markets like healthcare and diagnostics

M&A transactions in photonics is not a recent issue. A company like Danaher (US) has already been engaged for 15 years in photonics-based diversification. Established in the 1980s as a major supplier in industry and transportation, the successive acquisitions in the last 10 years of Leica (microscopy), Beckmann-Coulter (cytometry), Pall-ForteBio (biosensors), led to a multibillion dollar company, with about half of its revenues coming from photonics-based life sciences and diagnostics markets.

Figure 1: Danaher Business Portfolio (companies and revenues) Investor Presentation December 2015

Danaher competitors in life science and analytics like Thermo Fisher Scientific, GE Healthcare, and PerkinElmer, followed the same way by respective acquisition of Affymetrix (DNA sequencing), Biacore (SPR sensing), and Perten (infrared spectroscopy), all targets with strong revenues when M&A proceed.

Niche segment targeting in medium-size and emerging markets

The same analysis could be applied to the life sciences market, with the example of Teledyne (US), building up its instrumentation business unit through various acquisitions of Optech (Lidar, 2011), Axiom IC (fabless semiconductor, 2013), Photon Machines (laser processing, 2014), and Bowtech (subsea imaging, 2015). Unlike life sciences markets, target turnovers remain lower than tens of millions of dollars. Market fragmentation as well as cost of product validation and homologation are two reasons for this price difference between life sciences and environmental monitoring and analysis.

Last but not least, consolidation could occur to face an emerging market. Thorlabs (US) acquired various assets in the last four years in the infrared sensing market (infrared fibres from IR Photonics, materials and fibres processing from Vytran, quantum cascade lasers from Maxion and Corning) to propose a large product portfolio as soon as this market will ramp up.

An increasing number of transactions with a higher average valuation than other sectors

These are only examples. But according to the figures published by Ceres Technology Advisors (Needham, USA) founded by Linda Smith and that provides M&A advice and guidance in the photonics industry, the number of transactions almost doubled between 2012 and 2015 (see figure 2).

Figure 2: Total number of transactions in photonics (source: http://cerescom.net

The photonics industry, and vertical markets employing photonics technologies as core differentiators, realise higher average valuation in M&A than all other sectors, according to Ceres Technology Advisors. In photonics deals, the average valuation multiple (TEV/EBITDA) was more than 12.6 in 2015, compared to 11.2 for the healthcare industry. And for deals in photonics-enabled markets, the average valuation multiple is even larger, at 16.3.

A trend following the economic recovery

Photonics companies, like all high-tech companies, are characterised by their continual need to innovate in the face of strong competition and rapid product obsolescence.

An established firm can enter a new product market through acquisition or internal development. R&D is used within firms to create new products and growth opportunities. But they also rely on M&A as a mean of expediting shifts in their operations and portfolios.

After the 2008-2009 market crash, companies mainly focused on the restoration of their turnover and margin. But, over the past years, as the economy gradually recovered, large companies began to use their cash to fill persistent gaps in their product lines or extend them in new directions.

Of course, we can question this trend of M&A: Is it going to continue? And what does it mean for the photonics industry?

Further consolidation is needed to strengthen the highly fragmented photonics industry

According to our analysis, it is clear that consolidation of the photonics industry will continue in the coming years.

In fact, as highlighted by the above examples, photonics is entering major vertical markets like healthcare, transportation, and food and beverage. These vertical markets are often capital-intensive. But, the photonics industry is still highly fragmented.

SPIE conducted a study on 2,750 companies worldwide supplying photonics components and materials. These companies sell $156 billion of products. Of these companies, more than 2,000 realise revenues of less than $10 million, accounting for less than four per cent of the total sales (see figure 3).

Figure 3: Results of a study conducted by SPIE on 2,750 companies worldwide 

Furthermore, if we look at the various M&A during the last years, we see that the most important motivations are the following:

In fact, large firms will continue to acquire smaller companies providing highly differentiated products with strong intellectual property, providing access to key customer segments or filling gaps in emerging technologies. On the other side, the targets are companies with technologies and products that can get more value with the commercial channels and working capital of big companies behind them.

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