MRV Gets Needed Infusion Of Cash From Unusual Deal

Corporate Focus
by Anthony Palazzo

L.A. has lost another public company, and in an unusual manner. In a little-used mechanism known as a short-form merger, Luminent Inc. in late December got taken back under the wing of its majority owner, Chatsworth-based MRV Communications Inc. Net cost to MRV in the transaction: 5.2 million of its common shares (worth $24.7 million last week). Net gain to MRV's bank accounts: $93 million in cash.

That's a pretty good deal for MRV. It could use the dough, especially coming at such a cheap price. MRV, a holding company for various networking-related operating companies, lost $391 million combined in 2000 and the first nine months of 2001. Granted, a significant portion of the losses were non-cash charges related to acquisitions and stock options. Even so, MRV's cash dwindled by more than $70 million in the first nine months of last year, to $213 million at Sept. 30, 2001.

A person familiar with the deal said there were cost benefits involved, such as cutting back on the expense of separate boards and public-disclosure regimens. "If there's not an overall benefit you're just passing money," the source said.

At any rate, before the short-form transaction, MRV didn't have direct access to $93 million of the cash on its balance sheet. It sat in accounts of its 92 percent-owned optical-components subsidiary, Luminent. In November 2000, during the waning days of the optical craze that launched now-busted stocks such as JDS Uniphase Corp., Luminent sold 12 million shares to the public for $12 each. Proceeds were about $132 million. At that time, MRV said it planned to distribute all of Luminent's stock to MRV shareholders, as soon as a favorable Internal Revenue Service opinion was rendered. But shares of both companies swooned last year, and the distribution never occurred.

Luminent stumbled out of the gate, and its shares were worth $1.85 by the time they last traded, on Dec. 28, 2001. MRV fell as low as $2.25 after the Sept. 11 attacks, from a high of $21.69 on Feb. 9, 2001. It was at $4.89 recently.

'Takeunder' plan

MRV lost its chief financial officer, Edmund Glazer, a passenger on American Airlines Flight 11, which crashed into the World Trade Center. Days later, MRV announced the alternate "takeunder" plan. MRV executives have not returned repeated calls, but in an SEC filing, Chief Executive Noam Lotan said that in light of weaker demand for optical components, Luminent would gain better product integration and cost efficiencies within MRV.

Perhaps, but the benefits to MRV are clearer. Luminent's cash balance has fallen by 38 percent since the offering, but MRV's shares have fallen further, by about 80 percent. With these devalued shares, MRV captures the cash via the short-form merger that was invested in Luminent in better times, and at much higher prices.

The short-form merger is a shortcut through the normal merger-approval process that typically requires approvals from the acquired company's board and shareholders. When a parent company owns 80 to 90 percent of the acquisition target the amount varies by state these approvals aren't required, said John Heine, a spokesman for the Securities and Exchange Commission.

"All (minority shareholders) can really do is argue about the value" placed on the target company, said the source familiar with the Luminent deal. A spokesman for Capital Guardian Trust Co. of Los Angeles, Luminent's largest non-MRV former shareholder, declined to comment on the deal, citing company policy. Other former Luminent shareholders didn't return calls.

MRV said recently that it expects to report consolidated revenues between $71 million and $77 million for the fourth quarter ended Dec. 31, 2001 including a contribution from Luminent of $17.4 million to $19 million. In the fourth quarter of 2000, MRV reported revenue of $98 million, including $45 million from Luminent.



Financial Editor Anthony Palazzo can be reached at 323-549-5225, ext. 224 or at tpalazzo@labusinessjournal.com.

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