Acacia and Cisco logos

On 9 July, the networking-infrastructure giant Cisco Systems announced that it plans to acquire Acacia Communications, a 380-person Massachusetts-based firm specializing in the design and sale of high-speed coherent optical interconnects for communications.

Under the terms of the deal, Cisco will pay US$70 per Acacia share, or a net US$2.6 billion, in cash. The price represents a 46% premium over Acacia’s closing stock price of US$48.06 the day before the announcement, and a healthy multiple relative to analysts’ projections of roughly US$456 million in current-year revenues for the company. The deal is expected to close in the second half of Cisco’s July 2020 fiscal year, subject to regulatory approval.

Not surprisingly, Acacia shares took a healthy bounce on the news, surging 35% to close at US$64.91 on Tuesday. Cisco shares, meanwhile, ended the day basically flat.

Strategic move for Cisco

At the time of the deal’s announcement, Cisco, which reportedly accounts for 18% of Acacia’s current revenues, presented the acquisition as a strategic move to build on Cisco’s own existing suite of optical-networking products. That move, the company said, comes in the context of expanding internet data volumes, capacity constraints of existing fiber infrastructure, and a need to drive down costs per bit in data center, metro and long-haul networks.

“With the explosion of bandwidth in the multi-cloud era, optical-interconnect technologies are becoming increasingly strategic,” David Goeckler, the general manager of Cisco’s networking and security business, said in a press release. “The acquisition of Acacia will allow us to build on the strength of our switching, routing and optical-networking portfolio to address our customers’ most demanding requirements.”

In a separate blog post accompanying the announcement, Bill Gartner, the head of Cisco’s optical-systems business, noted that a key trend in the company’s cloud-service markets has been “the migration from chassis-based solutions to pluggable optics.” Gartner stressed that Acacia’s strong position both on the hardware and software side of coherent optical interconnects—as well as the fact that it is doing this work on a silicon photonics platform—could help Cisco’s clients navigate the transition to pluggables.

Toward integrated, simpler solutions

An Acacia press release accompanying the announcement stressed that “Cisco plans to support Acacia’s existing customers.” Analysts in a company conference call after the announcement, however, expressed some skepticism that some of Acacia’s existing customers, which compete directly with Cisco, would be interested in buying from the latter company.

Gartner, on the call, underscored that “having this technology in-house” would be the best way for Cisco to develop fully integrated and simpler solutions. This, Cisco suggested, could enable the company to pick up share in certain markets, particularly super-sized data centers run by behemoths such as Amazon and Google, where Cisco has not been as successful as in some other markets.

Graceful exit?

For Acacia, meanwhile, the deal arguably could represent an opportunity for a graceful (and lucrative) exit from what has become a difficult market. In a post in its LightTrends newsletter, the optical-communications market research firm LightCounting stressed the baleful impacts of recent U.S.–China trade tensions on Acacia—particularly given the on-again, off-again U.S. bans of purchases from ZTE, Acacia’s largest customer, in spring 2018 and of Hwawei, another key customer, in spring 2019.

In response, these companies and others are reportedly working to build their own manufacturing capabilities for components, including interconnects, as a self-defense measure to buffer against future global supply uncertainties. Further, LightCounting suggests, the broader dominance in the optical transport equipment market of large firms with their own chip-manufacturing capabilities has created some doubts on Acacia’s ability, as a stand-alone supplier, to achieve scale in certain markets.

Considering these and other factors, LightCounting concludes, “Acacia’s management made a prudent decision to join forces with Cisco.”