Marvell set to acquire Lumentum in $115BN all-stock deal

Photonics giant Lumentum is set to become part of the data center connectivity specialist Marvell Technology, after the two firms’ executive boards agreed an all-stock acquisition of Lumentum initially valued at $115 billion.

If consummated, the deal - which needs to be approved by both sets of company shareholders and regulatory authorities - would create something of a one-stop shop for the various silicon and photonic components that are used inside today’s high-speed optical interconnects.

But optics and electronics are rapidly moving towards increasingly integrated designs in the form of near-packaged optics (NPO) and co-packaged optics (CPO) solutions to replace copper links at every level of the data center, and the combination is largely aimed at streamlining the development and production of those future products.

Architectural shift

Speaking during an investor conference call to discuss the planned hook-up, described by the Financial Times as "the largest-ever M&A deal involving two publicly listed tech companies", Marvell CEO Matt Murphy said: “An opportunity like this comes along once in a generation. [Our] complementary technology portfolios will accelerate innovation, [and create] the pure-play leader in optical connectivity.”

“AI infrastructure is undergoing a fundamental architectural shift toward optical connectivity,” he added. “The companies that move first and help define this transition will set the standard for decades to come.”

Lumentum’s CEO Michael Hurlston remarked that combining his company’s leadership position in indium phosphide (InP) lasers and other in-demand active photonics components with Marvell’s complementary expertise in devices like digital signal processors (DSPs) would create a company uniquely positioned to capitalize on a total addressable market approaching some $550 billion by the end of the decade.

“Surging AI data traffic requires rapid hardware innovation, and this combination enhances our ability to deliver next-generation solutions at scale,” he said, pointing to the growing push of optical technology against the so-called “copper wall”. 

“Today, as hyperscale customers stand on the cusp of adopting scale-up optics, an architectural leap for high-volume manufacturing paired with world-class device performance is paramount,” he added. “As optics and silicon rapidly converge, we see customers demand unified solutions from partners capable of executing at scale.”

Integrated optics transition

For Murphy, the business combination will be better able to tackle the three major AI data center technology bottlenecks of performance, bandwidth, and energy efficiency than they would as separate entities.

“The next decade will be determined by optics,” he told investors. “The industry is shifting towards highly integrated optics, [but this] transition is still in its early stages. This is a once in a lifetime opportunity.”

While current “scale-across” and “scale-out” markets are dominated by discrete transceiver modules powering kilometer-scale links, next-generation “scale-up” and “scale-in” applications will connect individual chip packages but require the production of far more active photonic components.

A joint presentation by Marvell and Lumentum envisages what they term “extreme co-design” of highly integrated modules where Lumentum provides high-power continuous-wave lasers, micro-VCSELs, and photodiode arrays, while Marvell adds photonic and electronic integrated circuits inside advanced processing units.

“We believe the combined company’s ability to offer combined, fully co-designed, pre-validated optical engines at scale is truly a significant competitive advantage,” commented Hurlston, with Murphy adding: “[Customer] adoption is real, and the architecture is changing - this is not just a supply-demand situation. Everybody needs a light source, and the best light source [provider] out there is Lumentum.”

Purchase commitments

According to the terms of the deal, Lumentum shareholders will receive 4.5 shares of Marvell’s common stock for each share that they currently own, indicating that collectively they will end up owning one-third of the combined entity.

That exchange ratio was calculated to represent around $1132 per Lumentum share - equivalent to $115 billion, and a premium of 24 per cent on the firm’s Nasdaq-listed price last week - although news of the deal did see the stock prices of both companies drop in value significantly.

Assuming that both sets of shareholders and regulators do approve the acquisition, Murphy will continue as CEO and chairman, with Hurlston and two other Lumentum directors set to join the Marvell board. The approval process is expected to take several months, with a completion date in the first half of 2028 currently penciled in.

Meanwhile Lumentum took the opportunity to release its latest quarterly financial results a couple of days earlier than scheduled. They highlighted the ongoing business momentum from AI data center links, with sales revenues of $1.26 billion up 137 per cent on the same period last year as Lumentum’s pre-tax income ballooned to $370 million from just $5.2 million.

“During the quarter, we secured our second major NPO/CPO win, backed by purchase commitments exceeding $5 billion,” noted Hurlston, who is expecting sales to climb again to around $1.6 billion in the December quarter. He added that demand for pump lasers and optical circuit switches (OCS) were the leading contributors to that growth.

AI sales surge

Those figures compare with Marvell’s most recent sales figure of $2.74 billion for the three months ending August 1 - up 37 per cent year-on-year and also set to continue rising strongly.

The move to acquire Lumentum is not Marvell’s first foray into photonics technologies. Earlier this year the Santa Clara firm acquired the advanced optical interconnect startup Celestial AI, in a cash-plus-stock deal valued at $5.5 billion.

Marvell has also worked with micro-LED developer Mojo Vision on novel optical interconnect technology, while both Marvell and Lumentum have received $2 billion in investment from AI chip kingpin Nvidia in recent months.

And in related news Fabrinet, which works closely with Lumentum on the production of optical transceiver products, has posted sales of $1.47 billion in its latest quarter - up more than 50 per cent year-on-year, and again highlighting the current momentum in the AI data center business.

With that sales figure expected to move north of $1.6 billion in the December quarter, Fabrinet’s stock price jumped 16 per cent in early following the update, although recent worries over the sustainability of the AI infrastructure boom mean the Thailand-based firm’s valuation has dropped 50 per cent over the past six months.