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Oclaro [NASDAQ:OCLR] is regarded as a seller amid rising calls for the optical components industry to consolidate, according to the company’s CEO and three sector analysts.

The San Jose, California-based company has long been rumored to be a target for its larger rival Finisar[NASDAQ:FNSR], and the prospect of such a combination is now growing as the industry heads into a trough caused by oversupply, said analysts Richard Shannon of Craig-Hallum, Mark Kelleher of D.A. Davidson, and Michael Genovese of MKM Partners.

Another potential buyer of Oclaro is Lumentum [NASDAQ:LITE], they said.

Activist investor VIEX Capital Advisors disclosed a 1.4m share position in its June quarter 13F filing.

An acquisition of Oclaro could also now solve Finisar’s search for new leadership. Finisar announced on 6 September that CEO Jerry Rawls will retire at the end of 2018 and Greg Dougherty, Oclaro’s well-regarded CEO, could serve as the combined entity’s new chief executive, said Genovese and Shannon.

Genovese said he believes Finisar and Oclaro held discussions about a potential merger several months ago but that talks broke down when they could not agree on price.

Oclaro’s shares traded midday Wednesday at USD 8.57— giving it a market capitalization of USD 1.45bn — but in the last year they have traded as much as USD 11.30, a high reached in February. Finisar’s market cap is USD 2.48bn.

Oclaro is seen as a good fit for Finisar because of Oclaro’s leading position in analog coherent optical (ACO) components, in particular those that are used for sending signals over long distances – known in the industry as CFP2 ACO, said Kelleher and Shannon. If Finisar wanted to strengthen that area it would make sense to acquire Oclaro, added Kelleher.

Also, their China exposure is complementary: Oclaro is focused on serving the telecom market there, while Finisar’s focus is on the enterprise data center market there, added Kelleher.

But with Oclaro wanting a “nice premium” and neither Finisar nor Lumentum willing to pay “a peak price”, the buyers are expected to wait for Oclaro to stumble, Genovese said.

Before making any bid, Finisar and Lumentum will wait to see how far Oclaro’s stock falls due to weakness in China – where 2017 orders have slowed as telecom network companies Huawei and ZTE work through excessive inventory, said Kelleher. About 32% of Oclaro’s 4Q17 sales went to China.

“Finisar is picky on price. They’re waiting for smaller [optical component companies] to get comfortable with their valuations at lower levels, so that when they offer a premium they will be more receptive,” said Kelleher.

Oclaro’s CEO has previously spoken about the need for consolidation in the optical components industry. At a Roth conference in March, Dougherty told investors, “We think consolidation is an important part of this industry. The largest player has 20% market share. Most have 10%. Given the need for scale, for R&D and design, the need [for consolidation is clear].”

Asked by this news service to clarify those remarks afterwards, Dougherty said Oclaro could either be a buyer or a seller.

“Consolidation is the right thing for the space. We have been saying that for the last three years. The key point is that scale is important and the idea of getting stronger by getting together is a good thing,” he told this news service. Asked if that meant a company such as Finisar could buy Oclaro, Dougherty said that it could.

All three analysts said they viewed Oclaro as a more likely seller than a buyer.

Dougherty’s comments have been “consistent” with what the company has long said, said an Oclaro spokesperson for this article. “Consolidation would be healthy for the industry and I think others would agree,” said the spokesperson.

Finisar did not respond to a request for comment.

All three analysts argued in favor of consolidation in the optical components industry. “There are too many competitors making the same product in this industry right now,” said Genovese.

Demand for one fast-growing Oclaro product — called QSFP28, which is a 100Gb optical transceiver bought by Google, Facebook and Amazon for their data centers — is currently ahead of supply, meaning margins are very high, said Genovese. But with several competitors adding more capacity in this area, Genovese said supply and demand will come into balance in the next two-to-four quarters, which will lead to downward pressure on pricing and margins. It could potentially focus Oclaro’s mind on striking a deal before then, according to Genovese.

This cycle — whereby leaders of a new product category do well for a while before competitors jump in and create oversupply and push margins down — happens “over and over again” in the optical components industry, said Genovese.

“The optical industry has gone through boom and bust several times. If there were fewer vendors we could get a more organized pricing environment,” said Kelleher. Optical components vendors have for a while looked at the benefits of consolidation — and have cast their eye on the mergers in the DRAM industry, which previously had also suffered from similar boom-and-bust cycles — but so far no one has pulled the trigger, he added.

As supply begins to exceed demand and the pendulum swings away from optical vendors and back towards their customers, Oclaro and its peers will see gross margins and revenue growth slow, and that should create an environment where companies become more willing to merge, said Craig-Hallum’s Shannon. As a result, in the next six-to-12 months consolidation will become more likely than before, he predicted.

If Finisar does buy Oclaro, then that could spur more consolidation in the industry, with NeoPhotonics[NYSE:NPTN] and Applied OptoElectronics [NASDAQ:AAOI] seen as other targets for Lumentum or Finisar, said Genovese.

Oclaro is itself the product of historical consolidation: it formed in January 2009 after Bookham acquired Avanex. It then acquired Opnext in March 2012. The company then experienced a period of distress, launching an asset disposal program in early 2013 that led to the sale of two business lines to II-VI[NASDAQ:IIVI] in late 2013 and a smaller business line in August 2014. Dougherty was appointed CEO in June 2013 to fix Oclaro.A