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Two Nvidia-backed technology giants are in talks to merge, a move that would create a $300 billion company. Marvell Technology (MRVL) is in talks to buy Lumentum (LITE), a company that focuses on optics that are used widely in the data center industry.
Marvell Technology to buy Lumentum
According to Bloomberg, a deal to merge the two companies could be announced as soon as next week. The report warned that details were not yet finalized and that it could fall apart.
This would be one of the biggest deals this year as Lumentum has a market capitalization of over $82 billion. An attractive deal would give it a big premium, meaning that the purchase price could be as high as $100 billion.
Lumentum’s business is booming as the data center build-up gains momentum. In a recent statement, the company said that its products were sold out through 2029. Analysts now expect that its annual revenue will jump by 110% this year to $6.3 billion, followed by $10 billion next year. Lumentum often does better than estimates, meaning that its real numbers will likely be better than that.
Marvell, on the other hand, has become a big partner to other companies in the tech industry like Google and Microsoft. It helps these companies build their chips, which then compete with those made by Nvidia and AMD. Analysts expect Marvell’s revenue to hit $12 billion this year and $20 billion next year.
By buying Lumentum, Marvell aims to be the market leader in the optics industry. In other words, its products allow massive amounts of data to travel quickly and efficiently using light instead of traditional components. These products are in high demand as vast amounts of data are transferred in large data centers.
Potential deal faces challenges for Marvell Technology
A deal to acquire Lumentum would face some challenges for Marvell Technology. First, Lumentum is not a cheap company. It has a forward price-to-earnings ratio of 40, much higher than other companies, including Micron and Nvidia.
Second, Marvell will need to give away a substantial portion of its stock and raise billions of dollars to fund the buyout. It ended the last quarter with less than $4 billion in cash and short-term investments.
Further, there is a risk that the company is acquiring Lumentum at the peak of the AI boom. Indeed, the AI Stock Bubble Index has jumped to the highest level in months, and Ray Dalio and Ken Griffin are warning that it may burst soon.
In the past, M&A deals made at the peak of a cycle tend to face challenges. The most notable one is Teladoc’s purchase of Livongo Health at the peak of the pandemic. Teladoc had to announce a multi-billion-dollar impairment.
Therefore, the deal would be good for LITE stock, and highly bearish for MRVL, at least in the immediate future.
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