Marvell to buy Lumentum in all-stock deal at $115 billion enterprise value

U.S. chipmaker Marvell has signed a definitive agreement to acquire Lumentum, a U.S. maker of optical communications components. Marvell will pay entirely in its own stock rather than cash, in an all-stock transaction. The companies said the deal values Lumentum at an enterprise value of $115 billion. Enterprise value is the market value of a company's equity plus its debt, minus its cash. According to reports, it is the largest acquisition of a listed technology company on record. The deal is a big bet that connections inside data centers will move from copper to optics. Investors gave it a cold reception, though. Wary of dilution, they sent the two companies' shares down about 10% and about 16% the same day, according to reports.

For Japanese companies: There is no direct impact yet on the operations or finances of most companies. The deal matters to Japanese cable and electronic component makers that compete in, or supply parts and materials for, data center optical components and optical fiber. A major buyer and a competitor will become a single company, so pricing negotiations and business partners could change.

What was agreed

This is not a deal under consideration or negotiation. It is a definitive agreement approved by both companies' boards. Marvell announced it in an investor release, and Lumentum filed an 8-K with the U.S. Securities and Exchange Commission (SEC), the form companies use to report major events.

Lumentum shareholders will receive Marvell shares in exchange for their holdings. Marvell can make the purchase without spending cash on hand or taking on more debt. In return, it will issue a large number of new shares, which will reduce the per-share ownership of existing Marvell shareholders (dilution).

The $115 billion figure is equivalent to more than ¥10 trillion. The deal still needs approval from both companies' shareholders and clearance from competition authorities in several countries.

Why bet on optics

AI data centers link tens of thousands of GPUs so they can run as a single large computer. The amount of data moving across those links keeps growing. Until now, copper wiring was enough over short distances. But at higher speeds, copper uses more power and its signals cannot travel as far. As a result, optical links are being used in more places.

Lumentum's strength is in components such as the lasers that generate optical signals. Marvell makes chips that process optical signals, as well as custom AI chips that major cloud providers order for their own use. The acquisition will let one company supply both the optical components and the chips that drive them. The goal is to let customers buy all of a data center's internal connectivity from a single company.

Why the market sold

According to reports, Marvell shares fell about 10% and Lumentum shares about 16% on the day of the announcement.

Marvell's decline largely reflects concern about dilution. When a large number of new shares is issued, earnings per share fall until the acquired company's profits grow enough to make up the difference. Investors questioned whether the growth in demand for optics justified that price.

In an all-stock deal, the target's shareholders receive the acquirer's stock itself. So if Marvell shares fall, the value Lumentum shareholders receive falls too. Lumentum's steeper drop likely reflects this link, as well as disappointed expectations about the deal price.

The timing was also poor. AI stocks have been selling off, and credit default swap (CDS) spreads for major cloud companies have reportedly risen to their highest levels since 2021. CDS spreads are the price of insurance against a company failing to repay its debt. The largest acquisition on record arrived at a time of deep unease about continued AI spending.

The risks of the bet

The shift to optics will not follow a straight line. Elon Musk, who leads xAI, wrote on X that the network for an inference facility being built toward the end of the year would be far simpler and use less than half the optical fiber. Facilities built for inference rather than training could use simpler connection designs that need fewer optical components.

The small number of buyers is another risk. Optical components and AI chips are bought in bulk by a handful of major cloud providers and AI companies. If their capital spending slows, the combined company would take a bigger hit.

Three things to watch: first, whether regulators approve the deal, especially competition authorities in each country. Second, whether shareholders will vote in favor if Marvell shares fall further and the value Lumentum shareholders receive shrinks. And third, whether major cloud providers keep increasing their spending on optical connectivity.

Sources: Marvell's announcement, Lumentum's 8-K filed with the SEC, MarketScreener report