Nikon Buys Optos

(news & commentary)

This article isn’t on the main news/views page, as it doesn’t represent news about cameras. It’s here in the About Nikon section because diversification of business is really about Nikon in general.

bythom optos logo

Nikon announced plans to diversify into the medical business at the end of their fiscal year results meeting in May 2014. In February 2015, Nikon opted to purchase all shares of Optos, a retinal imaging company based in the UK, but which has most of their sales in the US. The sale price was apparently around US$400m, or about 2.8x annual sales. The offer price was also about a bit more than 30% over Optos’ share price at the time of the announcement. 

There’s no doubt that Nikon needs to diversify. It’s two largest businesses, semi-conductor manufacturing equipment and cameras, are both long in the tooth and in decline, and as I write this, neither looks like they’re going to have a chance to contribute to corporate growth in the the foreseeable future. Nikon’s third business, which is a bit of a catch-all for things like binoculars, spotting scopes, eyeglass lenses, microscopes, and more, has always been a very small business and recently not profitable at all. So, yes, Nikon needs a business that will serve them well in the future. 

From a “fit” standpoint, Optos slides right into Nikon: virtually everything Nikon does has an optical component to it, and the name Optos might give you a clue to just how important optics are to their business. So Nikon is diversifying into more uses of optics. Nothing wrong with that. Nor is there anything wrong with the price Nikon paid. It’s a bit high, but Nikon needs this to happen and quickly, so a premium is to be expected. 

Where I wonder about whether this is the right move for Nikon is not in the product or the financials. The key—and as far as I’m concerned only—factor in whether this acquisition will do what Nikon needs it to do is management. Not Optos’ management. Nikon’s management. 

Optos is highly US centric in sales (70%+ of their sales). It’s highly Western in management style, speed, and expectations (UK based). One of Nikon’s points in acquiring Optos is that Nikon is a global company, so the expectation is that they can take Optos large market share in the US and duplicate that in all the markets that Nikon is in. That would indeed make this a growth opportunity for Nikon, and would fully justify their acquisition. 

However, I’ve watched Nikon’s management for decades now. They’re top-down, consensus-driven, slow-to-act, micromanagers, and paternalistic when it comes to the customer. They’re also regulation and lawyer averse. And customers seem to come last when push comes to shove. I’m not sure that any of those things are useful in Optos’ market. In fact, I’m sure that many of those things would be large frictions to Optos’ expansion. 

Generally speaking, the business press seems to ignore the obvious: with all mergers and acquisitions the ultimate success or failure almost always is due to the manner, speed, and completeness with which the management teams and goals are merged. I’ll just say that I believe the jury will be out for a while on this one. If Nikon gives Optos a lot of rope and lets them operate as they have but with added resources and global support, this could work quite well for Nikon. If Nikon impresses too many of their established management traits on Optos, I fear that it’ll just be another business for Nikon that’s not got a lot of upside due to management decision making.

Finally, the elephant in the room: it’s possible for Nikon to lose more sales in steppers and cameras in the coming year than Optos will add. This does not in any way change Job One at Nikon: fix the Precision and Imaging businesses and get them fully realigned with smaller size and starting to grow again. Management has now taken on an additional chore by making an acquisition, which will take time and energy away from Job One if they’re not careful. 

So, unlike most analysts, who seem to either be reasonably optimistic or slightly pessimistic about the Optos acquisition, I’m agnostic. The new management team at Nikon has only been in place for a year now. Other than this acquisition and perhaps a willingness to issue service advisories more quickly, I’ve not yet seen anything from the new team that suggests to me that business isn’t as usual at Nikon. Optos won’t make or break the management team, it just adds a degree of difficulty in getting the future Nikon back to being an engine of growth, and healthy in all of its fundamentals. 

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