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Stock Analyst Update

What Acacia Pickup Means for Cisco

We're positive on the acquisition and are maintaining our current fair value estimate on Cisco for now.

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Narrow-moat Cisco (CSCO) announced its intention to acquire Acacia Communications (ACIA), a vendor of high-speed coherent optical interconnect products, for $2.6 billion ($70 per share) in cash. We view this acquisition in a positive light as Cisco bolsters its optical portfolio for applications outside of short-range data center interconnects. Acacia's technology gets Cisco ahead of the shift toward using pluggable optical modules instead of chassis-based options, and access to areas such as the metro, long-haul, and undersea markets. With traffic expected to continuously grow at an alarming rate with higher bandwidth items demanded at faster rates alongside 5G network buildouts, we believe Acacia helps Cisco capture more of the expected demand. More information regarding financial impacts are expected around the closing period in the second half of fiscal 2020, and we are maintaining our fair value estimate of $52 per share.

Cisco paid a 46% premium for Acacia's shares, or about 7.6 times Acacia's 2018 sales, which made up less than 1% of Cisco's fiscal 2018 revenue. Acacia had been on a downward trajectory since 2016, so we believe that Cisco was opportunistic to bolt-on technologies to its optical portfolio at this time. The shift toward pluggable optical modules is disruptive to Cisco hardware sales, but now the company can continue to be a holistic solution provider.

On the call, Cisco stated a commitment to serve existing and new Acacia customers (including competitors like Arista), and we expect Cisco's scale to help diversify Acacia's sales. Acacia's top five customers represented 74% of 2018 revenue, and the company was severely impacted by declines in its biggest market, China, partially due to the U.S. ban on ZTE products between May 15-July 13 of 2018. This acquisition follows closely behind the purchase of Luxtera for silicon photonics technology, and we view Cisco as ensuring its products are kept in front of trends disrupting the networking environment.

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