Marvell's optical deal looks dangerously myopic
LITE•Marvell is reportedly in advanced talks to buy Lumentum, a deal that could cost about $108 billion assuming a 30% premium. Analysts estimate $1.1 billion in potential synergies, but the implied 6% return would fall short of Lumentum's 10% cost of capital.
1. Expensive supply-chain move
Marvell Technology is reportedly eyeing a deal to buy Lumentum Holdings, which would give it greater control over the data center supply chain and expand its AI networking business. Lumentum makes lasers and other optical components, and its shares have risen 370% in the past 12 months.
2. Scarce optical capacity
Lumentum has said some products are sold out into early 2029 and it cannot meet about 70% of orders for some offerings through next year. Bernstein expects optical demand to exceed supply through 2028. Marvell shares trade at about 50 times expected 2027 earnings, compared with 31 times for Lumentum and 20 times for Coherent.
3. Returns and risks
A 30% premium to Lumentum's share price before reports of talks would imply a bid of approximately $108 billion. Morningstar analysts estimate that $1.1 billion in potential synergies, combined with Lumentum's forecast $6.8 billion of operating profit in 2029, would produce an implied return of 6%, below its 10% cost of capital. The article also cites the possibility that optical shortages ease, Marvell inherits a more manufacturing-intensive business, or Lumentum customers competing with it are alienated. Marvell has lost about $28 billion in market value since the talks were reported.
