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Stock Analyst Update

Cisco Ups Acacia Acquisition Price

After updating our model for the increased purchase price, we are maintaining our $48 fair value estimate for Cisco.

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Narrow-moat Cisco Systems (CSCO) has agreed to purchase Acacia Communications (ACIA) for $4.5 billion, or about $115 per Acacia share in cash. This is an update from the original July 2019 proposal worth $2.6 billion. Earlier this year, Acacia terminated the prior merger after stating that Cisco did not obtain the proper approval from the Chinese government for the deal before Jan. 8. After the termination, Cisco initiated legal action, claiming it had received the required approval, and Acacia countersued. The updated deal is expected to close in the first quarter of fiscal 2021. After updating our model for the increased purchase price, we are maintaining our $48 fair value estimate for Cisco and see the shares as slightly undervalued.

With Acacia, Cisco gains critical optics capabilities. Optics, including the pluggable form factor, have become an increasingly important part of expanding transmission speeds and the capacity within and outside of data centers. Acacia is a key optics supplier to hyperscale data center vendors, communication service providers, and enterprise data center operators. Cisco said it remains committed to serving Acacia’s clients, some of which could be key competitors in the networking market. We expect Cisco to tightly integrate optical capabilities into its products and strive for upselling opportunities in areas such as cloud data centers and 5G networks. In the previous agreement, Acacia was showcasing strong year-over-year revenue growth and bottom-line improvements. We believe these factors, along with not wanting to drag out a lawsuit and sour the relationship, and the importance of having robust optical offerings for Cisco, led to the increased acquisition price. After the deal closes, we expect Cisco to share information on the potential growth trajectory it hopes to gain from this sizable purchase.

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Mark Cash does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

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