After Finisar (FNSR) announced on December 14 that it would raise $575M by issuing convertible senior notes, versus its previous target of $512.5M, two research firms, Northland and Stifel, speculated that the company could be looking to make a significant acquisition. Oclaro (OCLR), Neophotonics (NPTN) and Applied Optoelectronics (AAOI) were named as possible takeover targets for Finisar and both firms agreed that Oclaro is the most likely target among those possibilities.

NORTHLAND TAKE ON M&A: Tim Savageau, an analyst at Northland, upgraded Finisar to Outperform from Market Perform, saying that the company's debt offering indicates that it's looking to make an acquisition in the optical component sector. The stock would react positively to any acquisition, since investors currently believe that the company relies too heavily on legacy datacom revenue, Savageau believes. Moreover, he thinks that an acquisition in the optical space would increase the company's growth. Savageau set a $40 price target on Finisar. Neophotonics appears to be a "very attractive" takeover target for Finisar, as a deal would produce significant manufacturing and operating spending synergies, Savageau stated. Finisar could buy the company for $20 per share, or $1B, and its earnings would still jump by 25%, the analyst estimated. However, Oclaro seems to be "a more likely candidate," partly because acquiring it would enable Finisar to accelerate its growth in 100G, add new customers in China, and improve its CFP2-ACO products, which have struggled, Savageau wrote. Finisar could pay $14 per share for Oclato and still raise its profits by 11%, the analyst believes.

STIFEL: Applied Optoelectronics could be a takeover target for Finisar, since such a deal would enable Finisar to offer more products for the intra datacenter market, wrote Stifel analyst Patrick Newton. However, Applied Optoelectronics' main product, the PSM4 QSFP28, is rather vulnerable to competition, so any advantages it brings would probably be "temporary," Newton believes. Conversely, an acquisition of Oclaro by Finisar "would make the most sense from a fit, scale, technology, and cultural perspective," the analyst wrote. Finisar could buy Oclaro for $13 per share, Newton estimated. The deal would provide Finisar with SG&A synergies of 65% and R&D synergies of 10% in fiscal 2018, he believes.

PRICE ACTION: In morning trading, Oclaro was flat at $9.23 per share, NeoPhotonics added 1% to $12.75, Applied Optoelectronics gained 2.4% to $25.28, and Finisar rose nearly 1% to $31.41 per share.