Marvell, Lumentum, and a potential acquisition rumor is like worlds colliding for folks following the networking connectivity space. Here’s what was published by Bloomberg:
Marvell Technology Inc. is in advanced talks to buy data center optics maker Lumentum Holdings Inc., according to people familiar with the matter, putting it on the cusp of a potential megadeal amid the race to scale up in the artificial intelligence sector.
A transaction may be announced as soon as next week, the people said, asking not to be identified because the discussions are private. Lumentum, which is backed by Nvidia Corp., has a market value of about $83 billion, while Marvell is worth around $221 billion.
An acquisition of Lumentum would likely rank among the 10 biggest tech and telecom mergers ever, according to data compiled by Bloomberg.
Marvell’s alleged acquisition of Lumentum comes at a time where there is a peak scarcity of lasers for the upcoming optical transition in datacenters. Lumentum’s lasers are in high demand across their EML, UHP CW, and OCS product lines, and the company is arguably priced at its peak. At Lumentum’s current market value, Mizuho estimates the purchase price at a 38% premium, for an upside as much as $1,260+ per share. But is Marvell in a position to actually buy Lumentum?
On Semi Doped , Austin Lyons and I spoke to Andrew Schmitt (Founder) and Scott Wilkinson (Lead Analyst for Optical Components) from Cignal AI - a provider of active research for the networking component market. The full episode will be published soon (link added below after publishing), but the discussion from experts who watch this space closely spurred some insights which I will share below. Stay tuned for the whole conversation.
The article below does not reflect the views of Cignal AI, Andrew or Scott. All shortcomings are my own.
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Marvell’s Purchase and Lumentum’s Sale
Marvell currently has about $4B in cash, and $5B in debt, so it cannot purchase Lumentum with cash outright. A premium above Lumentum’s existing market cap would require an excess of ~$80B above what Marvell’s current earnings would allow them to borrow. The acquisition can only go through in a stock deal, where Lumentum shareholders would get Marvell stock, diluting existing Marvell shareholder value.
If this went through, it would represent a costly purchase for Marvell and a big bet on their optical connectivity portfolio. Marvell did this successfully with their acquisition of Inphi in 2021, and investors today question if this consolidation will work out positively for Marvell like it did with Inphi.
From Lumentum’s side, it is puzzling why they would consider an acquisition at a time when their optical business is seemingly about to inflect upward. Their UHP CPO lasers are likely only paralleled by Broadcom, and their OCS business is expected to rapidly grow with Google, and according to Funda, even Nvidia is considering OCS as scale-up domains go beyond 8 racks past 2028. Their 200G EML lasers are among the most competitive in the market today.
Examining Motives
It is useful to understand the story from both sides of the aisle.
Marvell’s Vertical Integration
For Marvell, this is a story of vertical integration. If the deal closes, Marvell would own DSPs, lasers and modules at scale, and also sell the DSP to their module competitors. Even though the acquisition gives Marvell its own lasers, Andrew rejected the idea that this deal is for laser capacity citing that Marvell only buys tunable coherent lasers for its ZR modules, and it already has several suppliers for those.
For Marvell, buying Lumentum is a “better late than never” decision. Years ago, Lumentum’s product margins were nowhere near what they are today. Purchasing them alongside Inphi would have been a more consolidated approach at lower prices, but hindsight is 20-20 (oddly, also the year the Inphi acquisition was announced). However, at the time, companies were less inclined to buy low gross margin businesses which Lumentum was. If InP supply continues to remain short (which it seems like for the foreseeable future), then purchasing Lumentum would now put laser pricing power in Marvell’s hands.
Lumentum’s Shareholder Value
For Lumentum, there is likely simple explanation: shareholder value. If Marvell came to the table with an attractive purchase option, then it behooves the board to consider what is best for the shareholders regardless of future growth prospects. A bird in hand is worth two in the bush, so to speak. Andrew made an observation that Michael Hurlston arranged Finisar’s sale to Coherent (then II-VI) within 10 months after becoming CEO of Finisar. But it may have been that the deal was already in the works, and thus would not constitute as a smoking-gun that relates to Hurlston’s history of arranging acquisitions.
I have personally seen this dynamic in the acquisition of Integrated Device Technology (IDT) by Renesas, where I used to work in a past life. When Renesas came to IDT with a purchase offer, Greg Waters, an ex-Skyworks VP who was well loved within the company, regretfully informed the employees that although he had plans to grow IDT to a $1B company, the board decided it was best for shareholders to sell the company. Purchase valuation took precedence over growth prospects.
A Page from Broadcom’s Playbook
Andrew made a interesting parallel to how Broadcom played its cards and became market share leader, which I want to recount here. We will then apply the relevance to this rumored deal.
