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Coherent Corp.: From Optical Components to AI Infrastructure Giant
I. Introduction & Episode Teaser
Picture this: A nondescript industrial building in Saxonburg, Pennsylvania, sits on what was once the site of the world's first commercial radio station. Inside, scientists are growing crystals that will end up in everything from the iPhone's Face ID to the massive data centers powering ChatGPT. This is Coherent Corp.—a $14.5 billion photonics giant that most people have never heard of, yet whose technology touches nearly every aspect of modern digital life.
The story of Coherent is really three stories woven into one. It's the tale of II-VI, a Pittsburgh materials science company that spent five decades mastering the art of the acquisition. It's the saga of Finisar, the optical communications pioneer that bet everything on the data center boom. And it's the chronicle of the original Coherent Inc., the laser innovator founded in a Palo Alto garage that would eventually lend its name to this industrial conglomerate.
How did a company that started making infrared optics for CO2 lasers in 1971 become critical infrastructure for the AI revolution? The answer involves 50+ acquisitions, three major transformations, and a series of perfectly timed bets on technology inflection points—from industrial lasers to smartphone sensors to 800G transceivers. It's a masterclass in building through M&A, vertical integration as competitive advantage, and the compounding power of patient capital in deep tech.
Today, Coherent ships over 300 million data center transceivers annually from its Malaysia facility. Its silicon carbide substrates power electric vehicles and 5G base stations. Its laser systems cut everything from smartphone screens to aircraft turbine blades. But the real story isn't just about diversification—it's about how a roll-up strategy in the unsexy world of photonics created one of the most important companies you've never heard of.
What makes this particularly fascinating is the timing. Just as AI compute demands are exploding and requiring unprecedented optical bandwidth, Coherent emerges from its latest merger as one of only three Western companies capable of producing the advanced transceivers that make modern AI training clusters possible. This isn't luck—it's the culmination of strategic decisions made decades ago finally converging at exactly the right moment.
II. The II-VI Foundation: Building from the Periodic Table (1971–1990s)
The year is 1971. Nixon is president, Intel just released the 4004 microprocessor, and in a converted warehouse in Saxonburg, Pennsylvania, two engineers are melting zinc and selenium in a furnace, trying to grow crystals that can withstand the intense heat of industrial CO2 lasers.
Carl Johnson and James Hawkey weren't trying to build a photonics empire. They were solving a specific problem: industrial CO2 lasers, increasingly used for cutting and welding, needed optical components that wouldn't degrade under intense infrared radiation. Their solution was to master the growth of II-VI compound semiconductors—materials formed from elements in groups II and VI of the periodic table, like zinc selenide and cadmium telluride.
The company name itself was pure engineer pragmatism. No fancy branding exercise, no Latin roots—just "II-VI," pronounced "two-six," referencing the periodic table groups of their core materials. It was a name only a materials scientist could love, and that was exactly the point. This was a company built by engineers, for engineers. What made their location particularly fascinating was the site itself. The Saxonburg site contained buildings previously owned by KDKA, the world's first commercially licensed radio broadcasting station, which took to the waves around 1928. The site was expanded by Carnegie Tech and the US Nuclear Regulatory Commission to become a world-class, 400 MeV Synchrocyclotron Research Facility by the late 1940s. From radio waves to particle physics to photonics—the site itself embodied the evolution of American technology.
The early days were brutal. In 1972, during their pre-revenue period, Johnson and Hawkey missed several payrolls for themselves, but never missed a payroll for their two shop-floor employees. Their just-in-time successes at shaping, polishing and thin-film coating of cadmium telluride parts led to a late 1972 uptake in the sales of optics and Pockels cells. That saved the company.
The technical challenges were equally daunting. In the early days, they blew up a few vertical Bridgeman furnaces. No one was ever hurt, but you can't disable your furnace every third run and survive. They eventually solved that problem by finding a different way to synthesize the material. Hawkey knew how to get around those things, and Johnson got really good at rebuilding furnaces—he could have the damaged furnace ready to go again in 24 hours, about the time it took Hawkey to prepare the next load.
By the mid-1970s, II-VI had found its rhythm. The company achieved financial break-even by the nineteenth month of operation and installed a performance-based all-employee incentive plan in 1973, the first profitable year. This wasn't just about survival—it was about building a culture of ownership and excellence that would define the company for decades.
The real breakthrough came in their approach to quality. In 1972, II-VI set a new benchmark for the quality of cadmium telluride, according to measurements made by the Air Force Materials Lab at Wright-Patterson Air Force Base. Competition came from four teams involving the likes of Hughes Aircraft, Texas Instruments and MIT that all benefitted from million-dollar-plus contracts from the military. Two guys in a converted warehouse had just beaten teams backed by defense contractors and MIT. The path to becoming a public company was almost comically dramatic. Their IPO in 1987 was launched five days before the October stock market crash. By that time, they had run up a half-a-million dollars or more of legal and accounting and investment-banking bills. If you don't have a successful IPO, you probably can't even pay those bills. But they pulled it off, and the capital raised would prove transformative.
According to Carl Johnson, the funds raised by the IPO allowed II-VI to expand its zinc selenide manufacturing capacity. They didn't have enough funding to go ahead and build additional expensive zinc-selenide chemical vapour deposition furnaces. They wanted to build three or four quickly. The IPO allowed them to move aggressively and smartly ahead with their zinc-selenide manufacturing capacity expansion.
This expansion was critical. By 1985, II-VI had achieved self-sufficiency in the production of high-power, laser-grade zinc selenide. This had a huge impact on the company, enabling it to lay claim to being the world's best supplier of laser-grade zinc selenide. The power generated by some lasers had leaped from 300 watts in 1971 to 5,000 watts by 1987—and II-VI's materials made that possible.
By the early 1990s, II-VI collected nearly half its annual sales from foreign customers, conducting much of its international business in Japan. For years, the company faced little competition there, relying on a distributor to develop a leading position. But change was coming—Japan's Ministry of International Trade and Industry began promoting increased involvement by Japanese companies in the industrial laser business, including the production of advanced optical lenses.
The response would define II-VI's next chapter: rather than retreat, they would expand aggressively through acquisition, building capabilities that no single competitor could match. The foundation was set—a culture of engineering excellence, a public currency for acquisitions, and a proven ability to master complex materials science. The acquisition machine was about to begin.
III. The Acquisition Machine Begins: Strategic Expansion (1990s–2010s)
In 1997, something unexpected happened 35 miles from II-VI's Saxonburg headquarters. Westinghouse was shutting down its Science and Technology Center in Churchill, Pennsylvania, including a small but sophisticated silicon carbide research group. Carl Johnson drove down, initially just trying to buy their equipment and hire some of their people. Westinghouse, however, didn't feel comfortable selling to a small company in Saxonburg. They chose to sell to Litton Systems instead.
But Johnson didn't give up. II-VI purchased Litton Systems' silicon carbide group from Northrop Grumman in the 1990s—a move that seemed prescient given that the first commercial SiC diode wouldn't hit the market until a year later. This acquisition would plant the seeds for what would become, decades later, a multi-billion dollar silicon carbide business.
The Litton deal exemplified what would become II-VI's acquisition playbook: identify adjacent technologies where materials science expertise could create competitive advantage, acquire the assets at reasonable prices (often from larger companies divesting non-core operations), and integrate them into II-VI's manufacturing excellence culture. It wasn't about empire building—it was about assembling complementary pieces that would compound in value over time.
Virgo Optics came in 1995, and Lightning Optical Corporation in 1996. The combination of Virgo and Lightning created II-VI's VLOC division for developing one-micron solid-state lasers. These weren't random purchases—each acquisition expanded II-VI's wavelength coverage, moving from infrared into visible and near-infrared, following their customers as laser technology evolved. The 2000s marked a dramatic acceleration. Laser Power Optics in 2000; Marlow Industries in 2004; HIGHYAG (75% in 2007 and the remaining 25% in 2013); Photop Technologies in 2010; Oclaro's Santa Rosa, California, optics coating facility in 2012—each acquisition added a new capability or market access.
The Laser Power acquisition was particularly revealing of Johnson's approach. Laser Power, a $31 million-in-sales company founded by a former II-VI employee, manufactured infrared optics products used in carbon dioxide lasers purchased by industrial and military customers. Half of the company's sales were derived from contracts with the military, the part of Laser Power's business that interested Johnson in particular. Laser Power made domes for the front end of missiles that functioned as infrared eyes for the weapon, window assemblies for tanks and helicopters, and optical coatings for space-based lasers, additions that would enable Johnson to increase the less than 10 percent II-VI collected in sales from military work.
In a cash transaction valued at approximately $31 million, II-VI Inc. of Saxonburg, Pa., has purchased the equity interests of Marlow Industries Inc. in 2004. II-VI marked the occasion with a press release: "The Marlow acquisition represents a tremendous opportunity for II-VI Incorporated. Marlow's leading portfolio of thermoelectric cooling solutions complements our strong position in optical and optoelectronic components. ... Our combined company will offer one of the broadest product arrays to space, defense, medical, industrial, and telecommunications markets." This wasn't just about adding products—it was about creating system-level solutions.
The HIGHYAG acquisition brought German engineering excellence in fiber-delivered beam transmission systems. The Photop Technologies deal in 2010 was massive—initial consideration consisted of cash of approximately $45.6 million and approximately 1,150,000 shares of II-VI common stock, with earn-out opportunities based upon Photop achieving certain future financial targets. Photop, headquartered in Fuzhou, China with over 3,000 employees, was a vertically-integrated manufacturer of engineered materials, optical components, microchip lasers for visible display applications, and optical modules for use in fiber optic communication networks—suddenly II-VI had serious manufacturing scale in Asia.
But the real genius wasn't in any single acquisition—it was in how they fit together. The combination of materials expertise from the core business, coating technology from acquired companies, device manufacturing capabilities, and eventually system integration created a vertical integration story that competitors couldn't match. By 2004, II-VI had increased its annual revenue from $18.6 million in 1994 to $150 million. A decade later, they would be approaching billion-dollar scale. The VCSEL revolution deserves special attention. In 2016, II-VI made a bold double play: acquiring both EpiWorks Inc. and ANADIGICS Inc. for a combined $110 million. These weren't just acquisitions—they were a bet on the future of 3D sensing and what would become Face ID technology. VCSELs provide unique advantages in a variety of applications in consumer electronics, data centers, sensing, medical and industrial markets and are expected to grow at greater than 20% a year. Francis J. Kramer, Chairman and Chief Executive Officer said, "VCSELs address the need for increasingly intelligent human-machine interfaces such as gesture recognition in consumer electronics products as well as the growing demand for short-reach high-speed optical connectivity in data centers worldwide."
EpiWorks, Inc. is a global leader in high volume epitaxial growth of compound semiconductor wafers for electronic and photonic device applications. Located in Champaign, IL, it has 2015 revenue of approximately $14 million. Its 25,000-square foot, Class 1000 cleanroom epi foundry will provide significant expansion of II-VI's product portfolio. EpiWorks' expertise dovetails with II-VI's core competencies as an engineered materials company.
ANADIGICS, Inc. brings to II-VI a high volume foundry unmatched in the production of 6-inch gallium arsenide (GaAs) wafers. The acquisition of this foundry adds capacity more quickly and economically than building it new. The Anadigics deal was particularly dramatic—what started as a $0.35 per share deal with GaAs Labs turned into a bidding war, with II-VI ultimately paying $0.85 per share, 2.4 times the original price, fending off competition from an unnamed Chinese company.
The acquisition strategy wasn't just about collecting assets—it was about anticipating technology transitions. The acquisition of Avalon Photonics, Anadigics, and EpiWorks allowed II-VI to increase its production of vertical-cavity surface-emitting lasers (VCSELs), important to 3D sensing technology. This positioned them perfectly for the iPhone X launch in 2017 with Face ID, which would drive massive demand for VCSELs.
Financial discipline remained paramount throughout this expansion. Each acquisition was carefully integrated, with the company maintaining positive cash flow and using its strong balance sheet to fund growth. By the end of the 2010s, II-VI had transformed from a materials supplier to a vertically integrated photonics powerhouse with revenues approaching $1 billion. The stage was set for the company's biggest moves yet—acquisitions that would transform not just its scale, but its very identity.
IV. The Finisar Deal: Betting Big on Optical Communications (2019)
In November 2018, Chuck Mattera stood before the II-VI board with the biggest proposal in the company's history: acquire Finisar Corporation for $3.2 billion. The room was silent. This wasn't just another tuck-in acquisition—this was a bet-the-company move that would more than double II-VI's size and fundamentally reshape its identity.
Finisar wasn't just any optical communications company. Founded in 1987, it had pioneered many of the technologies that made modern data centers possible. Its transceivers—the devices that convert electrical signals to optical and back—were the workhorses of internet infrastructure, moving data at speeds measured in hundreds of gigabits per second. But Finisar had something else that made Mattera's pulse quicken: a massive installed base of VCSELs for 3D sensing in consumer devices and deep expertise in indium phosphide technology. The deal structure was complex but elegant. Under the terms of the merger agreement, Finisar's stockholders would receive $15.60 per share in cash and 0.2218 shares of II-VI common stock, valued at $10.40 per share—a total of $26.00 per share. This represented a 37.7% premium to Finisar's closing price on November 8, 2018. Finisar shareholders would own approximately 31% of the combined company.
The financing was equally ambitious: $1.9 billion of cash raised in a combination of Term Loans A and B with a combined interest rate of L+251, plus $1.1 billion of the company's stock. II-VI was betting that the synergies would more than justify the leverage.
But the real drama came in getting regulatory approval. The deal, announced in November 2018, wouldn't close until September 2019—almost a year later. The holdout was China's State Administration for Market Regulation (SAMR). In a world where optical communications were becoming critical infrastructure, the Chinese government wanted assurances. II-VI had to agree to operate Finisar's wavelength selective switch business separately for a period expected to be three years.
What made the deal compelling wasn't just Finisar's revenue—it was the technology complementarity. Finisar brought indium phosphide (InP) platform technology, critical for high-speed coherent transceivers. They had high volume 3D sensing VCSELs already shipping to major consumer electronics companies. And they had something else crucial: a massive former Texas Instruments facility in Sherman, Texas, that could be converted to VCSEL production.
The timing was prescient. Data center traffic was exploding, driven by cloud computing and the early stages of AI workloads. 5G deployments were accelerating. And autonomous vehicles were moving from concept to reality, each requiring dozens of laser-based sensors. The combined company would have annual revenues of approximately $2.5 billion and employ over 24,000 associates in 70 locations worldwide.
Dr. Vincent Mattera Jr., president and CEO of II-VI, captured the moment: "Disruptive megatrends driven by innovative uses of lasers and other engineered materials present huge growth opportunities for both of our companies." Michael Hurlston, CEO of Finisar, added: "This combination will accelerate our collective growth and will take advantage of the technology, products and manufacturing expertise that Finisar has uniquely developed over the course of its 30-year history."
The integration proceeded with military precision. II-VI organized itself into two segments: Photonic Solutions and Compound Semiconductors. The company targeted $150 million in run-rate synergies over three years—a target they would exceed. By leveraging Finisar's customer relationships in data centers with II-VI's materials expertise, they could offer vertically integrated solutions that competitors couldn't match.
The Finisar acquisition transformed II-VI from a diversified photonics company into a critical player in optical communications. But it also set the stage for an even more audacious move—one that would see the company not just grow, but fundamentally reimagine its identity.
V. The Coherent Inc. Mega-Merger: Creating a Photonics Giant (2021–2022)
In March 2021, as the world emerged from pandemic lockdowns and digital transformation accelerated at unprecedented pace, a bidding war erupted that would reshape the photonics industry. The target was Coherent Inc.—not to be confused with II-VI, despite what would soon become an ironic naming coincidence—a Santa Clara-based laser systems company with a storied 55-year history. Coherent Inc., founded by physicist James Hobart in May 1966, was laser royalty. They had pioneered CO2 lasers for industrial cutting, excimer lasers for eye surgery, and ultrafast lasers for precision manufacturing. With 2020 revenues of $1.15 billion, they were a prize worth fighting for.
What followed was one of the most dramatic bidding wars in photonics history. It started innocuously enough—in January 2021, Lumentum announced a $5.7 billion agreement to acquire Coherent. Each Coherent stockholder would receive $100.00 per share in cash and 1.1851 shares of Lumentum common stock. The deal made strategic sense: Lumentum, a supplier of 3D sensors used in iPhone's Face ID, would gain Coherent's industrial laser expertise.
But II-VI saw an opportunity to create something bigger. On February 12, they crashed the party with a $6.4 billion offer: $130.00 in cash and 1.3055 shares of II-VI common stock per Coherent share. MKS Instruments quickly joined the fray with a $6 billion bid. What followed was a dizzying escalation: Lumentum revised to $6.6 billion, II-VI countered with $6.5 billion, then $6.8 billion. By March, the bids had topped $7 billion.
The turning point came when II-VI secured backing from Bain Capital—up to $2 billion in financing that gave them the firepower to win. Their final offer: $220 cash plus 0.91 shares of II-VI stock per Coherent share, valuing the deal at approximately $7 billion. Lumentum made one last desperate push, offering $230 in cash and 0.6724 shares, technically worth $7.03 billion. But Coherent's board saw something beyond the numbers.
"In making its determination, the Coherent board of directors evaluated the comparative benefits and risks of the II-VI and Lumentum proposals, including the near-term and long-term financial opportunities and risks presented by each proposal, the potential synergies available through a combination with each company, and the complementary businesses of each company," Coherent said in their statement. Translation: II-VI offered a better strategic fit.
The deal structure was complex: $220 cash plus 0.91 shares of II-VI stock per Coherent share. The financing included more than $5.0 billion in debt financing, principally from J.P. Morgan, and convertible preferred equity of $1.8 billion from Bain Capital. Coherent had to pay Lumentum a $217.6 million termination fee—the price of walking away from their original agreement.
But then came the waiting. The deal, agreed in March 2021, wouldn't close until July 1, 2022—fifteen months later. The holdup? China's State Administration for Market Regulation (SAMR). In an increasingly tense geopolitical environment, Chinese regulators were taking their time approving deals involving critical technology companies. SAMR didn't provide antitrust clearance until June 28, 2022, almost exactly a year after shareholder approval.
When the deal finally closed, Mattera made a surprising announcement: the combined company would take the Coherent name. "We chose the name Coherent because of its meaning: bringing things together," Mattera explained. "This new company name and identity represents our unity in action, clarity of purpose, and broader sense of engagement with our customers."
It was a masterstroke of corporate diplomacy. By taking the Coherent name, II-VI signaled respect for the acquired company's legacy while also modernizing their own brand. No more explaining what "two-six" meant. The new Coherent Corp. would be a $4.5 billion revenue powerhouse with leadership positions across the photonics value chain—from materials to components to systems.
The combined entity now had unprecedented scale: II-VI's materials expertise complementing Coherent's laser systems strength, creating a vertically integrated giant capable of serving markets from consumer electronics to industrial manufacturing to emerging AI infrastructure. The timing, though delayed by regulatory approval, proved perfect—just as the AI boom was about to explode.
VI. The AI Moment: 800G Transceivers and Datacenter Dominance
In March 2024, Jensen Huang took the stage at GTC to unveil Nvidia's Blackwell architecture. The new AI chips would require unprecedented amounts of data bandwidth—measured not in gigabits but in terabits per second. Sitting in the audience, Coherent's new CEO Jim Anderson allowed himself a slight smile. His company had been preparing for this moment for years. Revenue Growth: In the fourth quarter of fiscal 2024, Coherent delivered 10% sequential revenue growth in its Communications market driven by strong sequential growth in 800G AI-related Datacom transceiver revenue. This wasn't just another quarter of growth—it was validation of a decade-long strategy to position for the AI revolution.
The numbers tell a remarkable story. During the quarter, Coherent achieved the milestone of having shipped over 300 million Datacom transceivers from its Ipoh, Malaysia, facility since its inception. Think about that scale: 300 million devices enabling the world's data to flow at the speed of light. Each transceiver, a marvel of photonics engineering, converts electrical signals from servers into optical signals that can travel kilometers through fiber optic cables without degradation.
The shift to 800G transceivers represents a quantum leap in capability. Today, more than 50% of Coherent's datacom revenue is generated by 200G and higher data-rate transceivers. Driven by the demands of growing AI/ML adoption, 800G transceivers are shipping in production and we expect the first 1.6T transceivers will ship in the next few years. Each generation requires exponential improvements in laser technology, signal processing, and thermal management.
What makes Coherent's position particularly strong is their vertical integration across multiple laser technologies. For link distances less than 100 m, including Level 0 interconnects and a subset of Level 1 interconnects, Vertical Cavity Surface Emitting Lasers (VCSELs) are used. These are based on our gallium arsenide (GaAs) technology platform. VCSELs are generally the lowest-cost, lowest-power consumption solution, and are the lasers of choice for less than 100 m connections. We're seeing significant demand for VCSEL-based transceivers for AI/ML applications. Coherent has multiple 6" GaAs VCSEL fabs in the U.S. and Europe. We are one of the highest-volume manufacturers of VCSELs in the world.
For longer distances, they deploy their indium phosphide expertise. For Level 1 switching for distances greater than can be supported by VCSELs, and for telecom access, single-mode devices are used. These devices are made from indium phosphide (InP) materials. Coherent has multiple InP fabs in the U.S. and Europe. Our InP technology platform is one of the very few in the industry that has been field-proven at scale, with more than two hundred million datacom lasers deployed in the field over the last two decades.
The market dynamics are extraordinary. Total shipments of leading-edge datacom optical modules are projected to tally over $9 billion for 2024, according to the latest Optical Components Report from research firm Cignal AI. Unit shipments of 400G and 800G modules have grown nearly fourfold over the past 12 months and are expected to surpass 20 million for 2024.
But the real story isn't just about current products—it's about staying ahead of the curve. AI datacenter demand remained a top growth engine, with full-year revenue in this space seeing a solid jump (+61% YoY) and Q4 FY 2025 showing strong YoY growth of 38% YoY. Coherent began shipping early batches of its 1.6T transceivers during the quarter and expects those shipments to ramp up through the rest of the year, with more impact in FY 2026. It also made progress on its 3.2T transceiver line, powered by its own 400G per lane EML tech – something it sees as a key market differentiator.
The competitive landscape is fierce but Coherent's advantages are structural. While competitors like Lumentum and MKS Instruments have strong positions in specific technologies, none match Coherent's vertical integration from crystal growth to system assembly. Its vertically integrated indium phosphide manufacturing – now tripled compared to last year – helps cut costs and strengthen supply chain reliability, keeping it well positioned in the high-speed interconnect market.
The financial impact has been dramatic. Coherent Corp. (NYSE: COHR) reported Q4 FY 2025 revenue of $1.53 billion, up 16% year-on-year (YoY) and 1.4% above consensus estimates. By segment, revenue growth was led by strength in Networking (+39% YoY), which offset weakness in Materials (-15.4% YoY) and Lasers (-2.1% YoY). Non-GAAP gross margin was 38.1%, an improvement of 220 basis points (bps) YoY. Non-GAAP operating income rose 35.8% YoY to $275 million (+0.8% above consensus), with an operating margin of 18% (Q4 FY 2025: 15.4%). Non-GAAP net income increased 73.6% YoY to $192 million. For FY 2025, revenue reached a record $5.81 billion, up 23% YoY.
The AI boom has fundamentally changed the economics of optical communications. Where once price was paramount, now availability and performance reign supreme. Hyperscalers building massive AI training clusters need transceivers that can handle the bandwidth requirements of GPU-to-GPU communication. A single training run for a large language model can cost millions of dollars in compute time—any bottleneck in data movement translates directly to increased costs.
This dynamic has shifted power to vertically integrated suppliers like Coherent who can guarantee supply, quality, and roadmap continuity. As one industry analyst noted, "In the AI era, optical interconnects have moved from being a commodity to being strategic infrastructure. Companies that can deliver at scale with technological differentiation will capture outsized value."
The transformation is just beginning. As AI models grow larger and training clusters expand from thousands to hundreds of thousands of GPUs, the demand for ever-faster optical interconnects will only accelerate. Coherent, with its unique combination of materials expertise, manufacturing scale, and technological breadth, sits at the center of this revolution.
VII. Silicon Carbide & Beyond: The Next Platform
While the world focuses on Coherent's AI datacenter dominance, a quieter revolution has been building in the company's silicon carbide business. In December 2023, something remarkable happened: Denso and Mitsubishi Electric invested $1 billion for a minority stake in Coherent's SiC unit, valuing it at approximately $4 billion. This wasn't just an investment—it was validation that Coherent had built something irreplaceable in the transition to electric vehicles and renewable energy. The journey to silicon carbide leadership began decades earlier, tracing back to that prescient acquisition of Litton's SiC group in the 1990s. But the real acceleration came through a series of strategic moves: acquisitions of INNOViON, Ascatron, and some of GE's patents have expanded its business in silicon carbide substrates. Each piece added capability, but together they created something transformative.
Silicon carbide's advantages are fundamental physics. It can handle higher voltages, temperatures, and frequencies than silicon—critical for everything from LEDs and lasers to 5G base stations, military radars, and most importantly, electric vehicles. When incorporated into electric vehicles and industrial infrastructure, SiC-based power electronics have demonstrated the potential to significantly reduce carbon dioxide emissions and accelerate the transition to a cleaner and more energy efficient world.
The Denso and Mitsubishi deal structure was elegant. Under the terms of the transaction announced on October 10, 2023, DENSO and Mitsubishi Electric each invested $500 million in exchange for a 12.5% non-controlling ownership interest in the Business, with Coherent owning the remaining 75%. Coherent has separated and contributed the Business to a new subsidiary that will operate the Business. Going forward, all operating and capital expenses of the Business will be funded by the Business. Coherent will control and operate the Business, which will continue to be led by Sohail Khan, Executive Vice President, Wide-Bandgap Electronics.
The strategic logic was compelling. In connection with the transaction, the Business has entered into arm's-length long-term supply arrangements with DENSO and Mitsubishi Electric that support their demand for 150 mm and 200 mm silicon carbide (SiC) substrates and epitaxial wafers. These weren't just customers—they were partners with skin in the game.
"Through this strategic relationship with Coherent, we will secure a stable procurement of SiC wafers, which are critical for battery electric vehicles, and contribute to the realization of a carbon-neutral society by promoting the widespread adoption of BEVs in all regions around the world," said Shinnosuke Hayashi, President & COO, Representative Member of the Board at DENSO.
The market opportunity is staggering. Market estimates indicate that the SiC total addressable market will grow from $3 billion in 2022 to $21 billion in 2030, representing a 28% compound annual growth rate. The transaction builds on Coherent's more than two decades of demonstrated leadership in SiC materials. In recent years, the Company has aggressively invested to scale its manufacturing of 150 mm and 200 mm substrates to address this underserved market.
But silicon carbide is just one piece of Coherent's next platform story. The company received its first volume order for its new Linebeam annealing systems for Gen 8 fabs driven by initial adoption of OLED for tablet and laptop computers. This represents entry into a completely new market—display manufacturing equipment—leveraging their laser expertise in novel ways. The Linebeam technology represents a fascinating convergence of Coherent's laser expertise with the exploding demand for OLED displays. Coherent is well-established as the premier provider of LTPS (Low-Temperature Polysilicon) annealing systems—in fact, virtually every major display manufacturer worldwide relies on our LineBeam systems. These systems use excimer lasers to convert amorphous silicon into polysilicon, enabling the production of brighter, more efficient displays.
The new LineBeam LB1300-G8 improves the efficiency of producing low-temperature polysilicon (LTPS) on the large Gen 8 substrate panels increasingly coming into use by display manufacturers. Manufacturers now want to switch to the newest Gen 8 OLED panels which are 2290 mm x 2620 mm in size. These are much larger than previous generation panels and potentially offer the cost reductions display makers are trying to achieve.
The OLED industry is now entering a cycle of new investments into 8-Gen AMOLED production lines, which is encouraging news for equipment makers such as Coherent. Samsung Display is already constructing its first such line, and both Visionox and BOE announced their own plans. Other companies, including LG Display, are also likely to construct new 8.6-Gen AMOLED lines soon.
What makes these new platforms—silicon carbide for power electronics, Linebeam for displays—so compelling is how they leverage Coherent's core competencies in new markets. The same materials science expertise that enables high-speed transceivers also creates silicon carbide substrates. The same laser technology that cuts smartphone screens also anneals display panels. It's vertical integration not just within markets, but across them.
The financial impact is already visible. The $4 billion valuation of the SiC business alone represents nearly 30% of Coherent's total market cap—and that's before the technology hits its inflection point with mass EV adoption. The display equipment business, while smaller, offers the kind of high-margin, sticky revenue that equipment suppliers dream of—once a fab standardizes on your tool, switching costs are prohibitive.
But perhaps most importantly, these new platforms position Coherent for the next wave of technology transitions. Silicon carbide enables the electrification of everything from vehicles to the power grid. Advanced displays enable the metaverse and augmented reality. Each platform reinforces the others, creating a flywheel of innovation and scale that competitors will struggle to match.
VIII. Financial Performance & Market Position
The numbers tell a story of transformation. In fiscal 2024, Coherent reported revenue of $5.30 billion, up from $4.62 billion in 2023—a 15% increase during what many considered a challenging year for the semiconductor industry. But the headline number obscures the more dramatic shift happening beneath the surface. The transformation shows most clearly in the margin story. Q4 fiscal 2024 saw GAAP gross margin of 32.9%, up 437 basis points year-over-year. Non-GAAP gross margin reached 37.2%, up 132 basis points. By Q4 fiscal 2025, non-GAAP gross margin had expanded to 38.1%, an improvement of 220 basis points year-over-year. For a company of Coherent's scale, each basis point of margin improvement represents millions in additional profit.
The three-segment structure reveals where value is being created. The Networking segment, driven by AI datacenter demand, grew 39% year-over-year in Q4 FY 2025, offsetting weakness in Materials (-15.4% YoY) and Lasers (-2.1% YoY). This isn't just a portfolio rebalancing—it's a fundamental shift in the company's center of gravity toward higher-margin, faster-growing markets.
Geographic distribution tells another story. While specific breakdowns aren't disclosed in recent filings, the company operates across 130 locations globally with significant presence in North America, Europe, and Asia. The Malaysia facility alone, shipping 300 million transceivers, represents one of the largest optical component manufacturing operations outside of China—critical for customers concerned about supply chain resilience.
Customer concentration remains both a strength and a risk. While not explicitly disclosed, industry sources suggest the top five customers likely represent over 40% of revenue—typical for optical component suppliers but creating vulnerability to demand shifts. The flip side: these relationships are deeply embedded, with multi-year technology roadmaps and switching costs measured in years and hundreds of millions of dollars.
Capital allocation has been disciplined despite the aggressive M&A strategy. During Q3 fiscal 2025, Coherent paid down $136 million of outstanding debt, demonstrating commitment to deleveraging post-acquisition. The company maintains significant financial flexibility, with the silicon carbide business now self-funding after the Denso/Mitsubishi investment.
The current market cap of $14.52 billion implies an enterprise value near $20 billion when including debt. Trading at roughly 3.4x forward revenues and 20x forward earnings, Coherent commands a premium to traditional industrial companies but a discount to pure-play semiconductor firms—reflecting its hybrid nature as both a materials science company and a technology enabler.
What's particularly impressive is the earnings trajectory. Non-GAAP EPS grew 49% year-over-year in Q4 FY2024 to $0.61, then accelerated to $1.00 in Q4 FY2025. Full-year FY2025 non-GAAP EPS of $3.53 represents a 111% increase from FY2024's $1.67. This isn't just revenue growth—it's operational leverage kicking in as the integration synergies materialize and mix shifts toward higher-margin products.
Looking forward, guidance remains robust. Q1 FY2026 revenue is expected between $1.46 billion and $1.60 billion, with non-GAAP gross margin between 37.5% and 39.5%, and EPS of $0.93 to $1.13. The company is clearly confident in continued momentum, particularly in AI-related markets.
But perhaps the most telling metric is R&D spending. At roughly 8% of revenue, Coherent invests more in R&D than many pure-play semiconductor companies. This isn't a company harvesting past innovations—it's actively building the next platforms. The 1.6T and 3.2T transceiver roadmaps, next-generation silicon carbide, and emerging display technologies all require sustained investment.
The financial performance validates the strategy. Through disciplined M&A, vertical integration, and technology leadership, Coherent has transformed from a collection of optical component businesses into an integrated platform capable of sustained growth and margin expansion. The numbers tell the story, but the real achievement is building a business model that becomes stronger with scale—a true compounding machine.
IX. Playbook: Lessons in Roll-up Strategy
If you want to understand how to build a multi-billion dollar industrial technology company through M&A, study Coherent. Over 50+ acquisitions spanning five decades, they've developed a playbook that's both ruthlessly disciplined and surprisingly creative. It's not about buying revenue—it's about assembling capabilities that compound in value over time.
The first lesson: technology adjacency matters more than market adjacency. When II-VI bought Litton's silicon carbide business in the 1990s, it seemed random—what did SiC have to do with infrared optics? But both involved crystal growth, high-temperature processing, and precision materials science. The technical DNA was compatible even if the end markets weren't. Twenty years later, that "random" acquisition anchors a $4 billion business.
The second principle: buy when others are divesting. Coherent's best deals came from larger companies shedding non-core assets. Litton's SiC group from Northrop Grumman. Oclaro's amplifier business. Infineon's transceiver products. These weren't competitive auctions—they were negotiated transactions where Coherent could demonstrate unique value as a buyer who would invest in and grow the business rather than harvest it.
Integration excellence separates successful roll-ups from value-destroying conglomerates. Coherent's approach is counterintuitive: they maintain distinct brands and facilities initially, focusing first on back-office integration and supply chain optimization. Only after understanding the acquired business's unique capabilities do they begin deeper integration. The EpiWorks and Anadigics acquisitions exemplify this—both maintained their identities as "II-VI EpiWorks" and continued operating semi-independently while benefiting from corporate scale.
The magic happens in vertical integration synergies. When Coherent acquires a component supplier, they don't just get the products—they get insight into their competitors' supply chains. When they buy a systems company, they understand end-customer requirements that inform component development. This intelligence advantage compounds with each acquisition. The Finisar deal brought customer relationships; the Coherent Inc. acquisition brought system-level expertise. Together, they create a feedback loop of innovation.
Timing matters, but not how you think. Coherent doesn't try to time market cycles—they time technology transitions. The VCSEL acquisitions in 2016 preceded the iPhone X by a year. The Finisar deal closed just as 400G transceivers were taking off. The silicon carbide investments ramped just as EVs hit their inflection point. They're not predicting the future—they're positioning for inevitabilities.
Financial discipline underpins everything. Despite aggressive acquisition activity, Coherent has never lost money for a full year on an operational basis. Each deal has clear synergy targets, typically $50-150 million within three years. They're religious about hitting these targets—the Finisar integration delivered $150 million in synergies, exactly as promised. This track record gives them credibility with investors to do the next deal.
The human element often determines success or failure. Coherent typically retains target company management, at least initially. Quesnell Hartmann still runs EpiWorks. Sohail Khan leads the SiC business. This isn't sentimentality—it's recognition that deep technical expertise takes decades to build and can't be replaced by corporate executives. The acquiring company provides capital, scale, and systems; the acquired team provides innovation and customer relationships.
Scale enables capabilities that create competitive moats. Coherent now operates one of the only Western 6-inch GaAs fabs, multiple InP facilities, and extensive SiC capacity. No single acquisition could justify these investments, but together they create a platform that competitors can't replicate without similar scale. This is the roll-up endgame: becoming so vertically integrated that you're competing on a different playing field.
Risk management is embedded in the model. By operating across multiple end markets—datacenter, automotive, industrial, consumer—Coherent can weather downturns in any single sector. The Materials segment weakness in FY2025 was offset by Networking strength. When consumer electronics are weak, industrial lasers might be strong. This diversification isn't accidental—it's architected through acquisition selection.
The cultural challenge is real but manageable. Coherent has evolved from a Pittsburgh materials science company to a global technology conglomerate with operations from California to China. Maintaining cohesion requires clear principles: engineering excellence, customer focus, operational discipline. The company name change to Coherent wasn't just branding—it was a statement that despite diverse origins, they operate as one company.
The playbook continues to evolve. The recent sale of the Aerospace and Defense unit for $400 million shows willingness to prune the portfolio. Not every acquisition works perfectly, and recognizing this—then acting decisively—is part of the discipline. The proceeds immediately went to debt reduction, maintaining financial flexibility for the next opportunity.
Looking forward, the playbook suggests where Coherent might go next. Gaps in the portfolio—like advanced packaging, quantum photonics, or micro-LED technology—represent potential acquisition targets. Companies struggling with scale but possessing unique technology fit the profile. In an industry consolidating rapidly, Coherent's proven integration capability makes them a buyer of choice for founders looking for good homes for their technology.
The lesson for investors is clear: in deep tech industries, successful roll-ups create lasting value through capability accumulation, not financial engineering. Coherent proves that with the right strategy, discipline, and patience, 1+1 can equal 3—but only if you're willing to play the long game.
X. Bear vs. Bull Case & Investment Analysis
The Bull Case: Riding Multiple Waves
The bulls see Coherent as perfectly positioned for the three megatrends reshaping technology: AI infrastructure, vehicle electrification, and display revolution. Start with AI—every large language model training run, every inference query, every GPU cluster depends on optical interconnects. Coherent ships the picks and shovels. With 800G transceivers ramping and 1.6T on the horizon, they're looking at a market growing 30%+ annually where they're one of only three scaled suppliers.
The silicon carbide opportunity might be even larger. EVs represent just the beginning—SiC enables everything from solar inverters to 5G base stations to industrial motor drives. The $4 billion valuation from Denso/Mitsubishi implies the business alone is worth nearly 30% of Coherent's market cap, yet it's growing faster than the corporate average. As SiC reaches cost parity with silicon in more applications, the TAM expands exponentially.
Vertical integration becomes more valuable in a world of supply chain uncertainty. While competitors scramble for InP substrates or VCSEL capacity, Coherent controls their entire stack. This isn't just about cost—it's about ability to guarantee supply to hyperscalers who lose millions for every day of delayed datacenter deployment. In a world where availability trumps price, vertical integration is a license to print money.
The margin story has legs. From 30% gross margins to approaching 40%, with a path to mid-40s as mix shifts toward higher-value products. Operating leverage is kicking in—incremental margins above 50% as the fixed cost base absorbs higher volumes. This isn't a commodity business anymore—it's a technology platform with software-like unit economics at scale.
Management quality matters. Jim Anderson transformed Lattice Semiconductor before joining Coherent. Early moves—portfolio rationalization, cost discipline, customer focus—mirror his Lattice playbook. The highest-paid CEO of 2024 according to some reports, Anderson's compensation is heavily equity-based, aligning him with shareholders for the long term.
Valuation remains reasonable despite the run. At 20x forward earnings, Coherent trades at a discount to semiconductor peers like Marvell (30x) or Broadcom (35x) despite similar growth rates. The market still views this as an industrial company, not a tech stock. As the AI revenue mix increases and margins expand, multiple expansion seems inevitable.
The Bear Case: Complexity and Concentration
The bears worry about customer concentration. If the top five customers represent 40%+ of revenue (as industry sources suggest), losing even one would be catastrophic. The hyperscaler capex cycle is notoriously volatile—what happens when Amazon or Microsoft pauses datacenter builds? The 2022-2023 slowdown showed how quickly optical component demand can evaporate.
Integration risk remains real. Three major mergers in five years, creating a sprawling organization with 130 locations and conflicting cultures. The Coherent name change papers over deep differences—California laser engineers, Pittsburgh materials scientists, Chinese manufacturing teams. One integration hiccup, one key customer defection during a product transition, and the whole model unravels.
China represents both opportunity and existential risk. Significant manufacturing in Malaysia and China creates geopolitical vulnerability. Export restrictions on advanced semiconductors could expand to optical components. Chinese competitors like Innolight are moving upmarket rapidly, backed by unlimited state capital. The technology moat might be shallower than it appears.
The cycle always turns. Datacenter spending can't grow 30% forever. EV adoption might slow if subsidies disappear. Industrial markets are softening globally. Coherent is more diversified than peers but not immune to a synchronized downturn. Fixed costs from recent acquisitions create operating leverage in reverse during downturns.
Competition is intensifying. Lumentum remains formidable in transceivers. Broadcom is investing heavily in silicon photonics. Chinese suppliers are gaining share in sub-400G markets. Even customers like Amazon are designing their own optical components. The competitive moat might be narrowing just as the market attracts more attention.
Debt remains elevated. Despite paydown progress, net debt exceeds $5 billion. Rising interest rates increase carrying costs. An acquisition-driven strategy requires financial flexibility—high leverage limits options. In a downturn, debt service could consume cash needed for R&D, creating a vicious cycle of underinvestment and share loss.
The Verdict: Execution Risk vs. Structural Advantage
The investment case ultimately comes down to whether you believe Coherent's structural advantages—vertical integration, scale, technology breadth—outweigh execution risks. The bull case is compelling: riding multiple secular trends with differentiated capabilities and expanding margins. The bear case is concerning: customer concentration, integration complexity, and competitive threats create multiple failure points.
The key tell will be margins. If gross margins continue expanding toward 40%, it validates the mix shift and pricing power thesis. If they stall or reverse, it suggests commoditization is beginning. Watch the 1.6T transceiver ramp—success here locks in datacenter leadership for the next cycle. Monitor SiC substrate yields—this determines whether the EV opportunity materializes.
For long-term investors, Coherent offers exposure to critical enabling technologies with limited alternatives. For traders, volatility around earnings and customer announcements creates opportunities. The transformation from industrial supplier to technology platform is real but incomplete. The next 18 months will determine whether this becomes a compounding machine or remains a cyclical industrial.
XI. Power & Prediction: What Comes Next
The next decade of photonics will be shaped by three converging forces: the physical limits of electronics, the explosion of AI compute demands, and the imperative of energy efficiency. Coherent sits at the intersection of all three, but their future depends on navigating technical discontinuities that could reshape the entire industry.
The most immediate opportunity is optical compute. As electronic transistors approach atomic limits, photonics offers a path forward. Coherent's transceivers today move data between chips; tomorrow's products might process data within chips. Early photonic processors from startups like Lightmatter show promise. Coherent hasn't announced optical compute products, but their materials expertise and manufacturing scale position them as a natural partner or acquirer.
Co-packaged optics (CPO) represents the next battlefield. Instead of separate transceivers, optical engines will be integrated directly with switch ASICs and GPUs. This collapses the supply chain—potentially disastrous for standalone transceiver suppliers. But Coherent's vertical integration could be an advantage. They supply the lasers, the materials, the packaging technology. While competitors lose the transceiver opportunity, Coherent captures value at the component level.
The silicon carbide story is just beginning. Today's applications—EVs and 5G—represent perhaps 10% of the ultimate opportunity. As SiC costs decline and reliability improves, it will replace silicon in most power applications above 600V. Industrial motor drives, renewable energy, grid infrastructure—each market is larger than the current EV opportunity. The Denso/Mitsubishi partnership provides not just capital but market access and credibility.
Quantum photonics looms as both opportunity and disruption. Quantum computers require precise optical control for qubit manipulation. Quantum communications depend on single-photon sources and detectors. Coherent has the materials science capability but hasn't signaled quantum ambitions. This could be the next major acquisition target—companies like PsiQuantum or Xanadu that need manufacturing scale.
Geographic reshoring accelerates. The CHIPS Act and European Chips Act create incentives for domestic production. Coherent's US and European manufacturing base becomes more valuable as customers seek supply chain resilience. Expect announcements of new US facilities, likely with government support. The Malaysia operations provide Asian presence without China risk—increasingly important as geopolitical tensions rise.
The competitive landscape will consolidate further. Of the dozen major photonics companies a decade ago, half have been acquired. The remaining independents—Lumentum, MKS Instruments, IPG Photonics—face scale disadvantages. Coherent could be acquirer or acquired. A combination with Lumentum would create an optical components monopoly (likely facing antitrust challenges). Acquisition by a semiconductor giant like Broadcom or Marvell would validate the silicon photonics convergence thesis.
New CEO Jim Anderson's strategic priorities are becoming clear: focus on AI infrastructure, expand silicon carbide capacity, and improve operational efficiency. The sale of non-core assets will continue—expect divestitures in slow-growth industrial segments. The capital will fund organic growth in core markets rather than major acquisitions. This is a consolidation phase, not an expansion phase.
Technology roadmaps reveal the future. The progression from 800G to 1.6T to 3.2T transceivers follows a predictable cadence—doubling bandwidth every two years. Linear extrapolation suggests 6.4T by 2028, 12.8T by 2030. Each generation requires fundamental innovations in modulation, materials, and packaging. Coherent's R&D investments today determine market position in 2030.
The key metrics to watch: - Datacenter revenue mix: Should exceed 50% within two years - Gross margins: Breaking 40% validates the transformation - SiC revenue: $1 billion run-rate by 2027 proves the platform - Customer concentration: Declining concentration shows market broadening - R&D intensity: Must remain above 8% to stay competitive
The wildcard is AI evolution. Current architecture—massive training clusters connected by optical networks—might not persist. Edge AI, neuromorphic computing, or quantum-classical hybrids could reshape demand. Coherent must balance optimization for current architecture with flexibility for paradigm shifts.
Climate technology creates unexpected opportunities. Laser-based carbon capture, photonic environmental sensors, energy-efficient lighting—each leverages Coherent's capabilities in new markets. These aren't billion-dollar opportunities today but could be by 2030. The company that enables decarbonization while riding the AI wave captures both economic and ESG value.
For investors, the next 18 months are critical. The 1.6T ramp determines competitive position in next-generation datacenters. SiC substrate yields hitting targets unlock the EV opportunity. Margin expansion continuing validates the mix shift thesis. Any stumble—product delay, customer loss, integration issues—resets the narrative from transformation to troubled roll-up.
The prediction: Coherent emerges as one of three Western photonics giants (alongside a merged Lumentum-MKS and Broadcom's optical division) that dominate AI infrastructure. The silicon carbide business gets spun out or sold at a premium valuation. The company maintains independence through 2027 before being acquired by a semiconductor or systems giant seeking vertical integration. The photonics revolution is just beginning, and Coherent has built the platform to capitalize—if they can execute through the complexity they've created.
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