On October 29th, there were reports that chip manufacturer Marvell Technology (Marvell Technology) was in advanced negotiations to acquire optical communication equipment supplier Lumentum, with the deal potentially being finalized next week. Driven by these rumors, the stock price of Lumentum rose by more than 6% before the market opened, while Marvell's stock price fell by over 12%. Currently, the market value of Lumentum is approximately $83 billion, and Marvell's market value is around $221 billion. If a full acquisition agreement is ultimately reached, this deal is expected to rank among the top ten largest mergers and acquisitions in the history of the technology and telecommunications industries.
The acquisition targets the optical communication needs of the AI data center; some product orders for Lumentum have been scheduled until 2029.
The main driving force behind this potential acquisition comes from the surge in demand for high-speed optical communication equipment at the AI data center. As the scale of the AI computing cluster continues to expand, traditional copper cable connections are gradually becoming insufficient to meet the requirements for data transmission speed, power consumption, and transmission distance, thus highlighting the increasing importance of optical communication technology.
Lumentum mainly produces indium phosphide (InP) lasers and optical communication devices, and is an important supplier of high-speed optical interconnection equipment. The company's CEO, Michael Hirston, stated this month that orders for some optical communication products have already been filled through to the beginning of 2029. Even though the company plans to invest $350 million in Japan to expand production capacity, it is expected that it will still not be able to meet about 70% of the market demand for certain products next year.
For Micron, the acquisition of Lumentum not only helps to alleviate the issue of insufficient supply of key optical components but also allows for the integration of its own digital signal processor (DSP) technology with Lumentum's laser manufacturing capabilities. Coupled with the previously acquired photonics technology startup Celestial AI, Micron is poised to further refine its product lineup from chips to optical communication equipment and engage in more comprehensive competition with other rivals.
Stifel Analyst Torre Swenberg believes that mastering both chip and optical device technologies will enable the merged company to optimize data transmission performance, power consumption, and latency at the overall system level, and to establish a competitive advantage in areas such as high-speed network equipment and co-packaged optics ( CPO ).
Divergent views on Wall Street: A huge acquisition could drag down Myriel's profits
There are clear disagreements among Wall Street analysts regarding the valuation and financial impact of potential transactions.
Mizuho analyst Vijay Lakshesh reiterated the ‘outperform the market’ rating for Lumentum, maintaining a target price of $1,140. He pointed out that historically, the average premium for acquisitions in the semiconductor industry is around 38%; considering Lumentum’s competitive advantages in the areas of optical switching and lasers, potential acquisition bids could exceed $1,260 per share.
However, Raymond James analyst Simon Leopold is cautious about Myriel's completion of such a large-scale acquisition. Myriel currently holds approximately $4 billion in cash and is also burdened with about $5 billion in long-term debt; acquiring Lumentum could put significant pressure on its balance sheet.
According to the analyst's calculations, depending on the different financing scales and transaction structures, the merged company may only achieve roughly the same earnings per share by 2028, or it could even lead to a dilution of Mywell's earnings per share by about 10%. He believes that these potential financial impacts increase the uncertainty surrounding the final outcome of the transaction.
In addition, the transactions still need to undergo regulatory review, and it may take some time to be actually completed. If Maiwell further expands its business into the field of optical communication devices, it may also compete with existing DSP chip customers, prompting some of them to switch to other chip suppliers.
