Marvell's optical deal looks dangerously myopic

Marvell Technology

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The author is a Reuters Breakingviews columnist. The opinions expressed are her own.
By Karen Kwok
NEW YORK, Oct 29 (Reuters Breakingviews) - Marvell Technology MRVL.O may have found an expensive shortcut in the race to move artificial-intelligence data at light speed. The $200 billion chipmaker is eyeing a potential deal to buy Lumentum Holdings LITE.O, Bloomberg reported on Wednesday. Doing so would give it control over more of the data center supply chain and create an AI networking giant. The strategic logic is bright; the financial returns are dimmer.
Marvell designs processors and networking technology that help the likes of Amazon.com build custom chips as an alternative to Nvidia NVDA.O. Lumentum makes lasers and other optical components that transmit data using light, speeding up connections within and between data centers. Its shares have soared 370% in the past 12 months.
Lumentum's attraction is scarcity. Boss Michael Hurlston has said some products are sold out into early 2029 and the $83 billion company is unable to meet about 70% of orders for some of its offerings through next year. Bernstein expects optical demand to exceed supply through 2028. Potential US restrictions on Chinese rivals could tighten inventory further.
Buying Lumentum would allow Marvell to better compete with rival Broadcom AVGO.O. It is in a decent position, too. Marvell's stock trades at about 50 times expected 2027 earnings, against Lumentum's 31 times and rival Coherent's COHR.N 20 times, according to Visible Alpha.
But any potential acquisition likely won't come cheap. Assume a 30% premium to Lumentum's share price before news of talks emerged, and it would imply a bid of approximately $108 billion. Cost savings could be chunky if Marvell could generate $1.1 billion of potential synergies - roughly 1% of the offer value and in line with similar transactions. Yet add those efficiencies to Lumentum's forecast $6.8 billion of operating profit in 2029, tax it, and the implied return of 6% falls short of Lumentum's cost of capital of 10%, according to Morningstar analysts.
What's more, optical shortages could ease if technology quickly changes. Marvell would also inherit a more manufacturing-intensive business and could alienate customers that compete with Lumentum.
Marvell has lost about $28 billion in market value since the talks were reported. It suggests fears of a union coming together at the frothy peak of the cycle that risks leaving shareholders in the dark.
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CONTEXT NEWS
Marvell Technology is in advanced talks to buy data-center optics maker Lumentum Holdings, Reuters reported on October 28 citing a source familiar with the matter.
Shares ⁠of Lumentum, which has a market value of roughly $83 billion, rose about 4% on October 29 in early afternoon trading. Marvell shares fell more ​than 12%.

(Editing by Jennifer Saba; Production by Pranav Kiran)
((For previous columns by the author, Reuters customers can click on KWOK/karen.kwok@thomsonreuters.com))