There was some pretty big M&A news in the optical space as Cisco (CSCO) announced it will acquire Acacia Communications (ACIA), which happens to be a supplier to Cisco. Cisco has agreed to pay $70 per share in cash, making the deal worth approximately $2.6 bln, net of cash/securities.
Acacia makes optical interconnect products that are used by cloud infrastructure operators and content and communication service providers. Its products are made using a silicon-based platform, a process Acacia calls the siliconization of optical interconnect. In fact, in its 10-K, Acacia says it sees its silicon-based interconnect technology as "leading a disruption that is analogous to the computing industry's integration of multiple functions into a microprocessor."
Acacia makes embedded and pluggable modules as well as semiconductors. Its modules are used in long-haul, metro, and inter-data center markets while its semiconductors are either integrated into its modules or sold to customers on a standalone basis for integration into customer modules, according to the 10-K.
So why do this deal? In particular, the pluggable module segment of the business is the draw for Cisco. It's a high growth area and it's still in the early stages.
The industry is "transitioning from chassis-based systems to pluggable technology to simplify operations," according to the press release. Acacia CEO Raj Shanmugaraj describes coherent technology as being a "game-changer for optical networking and continues to evolve with the deployment of pluggable coherent optics."
We think the deal makes sense for Cisco as the networking giant will be able to incorporate Acacia's technology into its optical offering. However, the premium seems pretty rich at 46% above yesterday's close. Perhaps there were concerns other suitors may make a bid. Even if the purchase price is high, the $2.6 bln price tag is pretty modest for Cisco which has a $242 bln market cap. After some struggles in 2018, this seems to be a nice exit strategy for the company, especially with the rich premium this deal provides
On a final note, the rich premium this deal is generating should spark some interest in other optical component stocks in the coming days/weeks. Names we would keep on the radar include Acacia competitors: AAOI, IPHI, NPTN, LITE, IIVI, FNSR.