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Cisco Buys Acacia for $2.6 Billion to Add Optical Technology

Ian King

(Bloomberg) -- Cisco Systems Inc. agreed to buy Acacia Communications Inc. for about $2.6 billion, the technology giant’s latest acquisition as it seeks technologies to meet customer demand for more robust networks.

The San Jose-based company will pay $70 a share, a 46% premium to Acacia’s closing price on Monday, the companies said in a statement Tuesday. The purchase price is about $2.6 billion on a fully diluted basis net of cash and marketable securities, and the deal is expected to close in the second half of Cisco’s fiscal 2020 year.

Cisco, whose equipment makes up the backbone of the internet and corporate networks, has recently rekindled growth by revamping existing products and adding new software and services under a corporate makeover by Chief Executive Officer Chuck Robbins. In May, the company gave a bullish sales and profit forecast for the current period, a sign that corporations continue to spend on computer networks despite the trade dispute between China and the U.S.

“Bringing Acacia’s high-speed digital signal processing (DSP) technologies in-house allows Cisco to better compete with peers, such as Ciena,” said Woo Jin Ho, senior technology analyst at Bloomberg Intelligence.

Acacia’s stock surged 35% to $64.91 Tuesday in New York, while Cisco shares were little changed at $56.34. Cisco’s stock had climbed 30% this year through Monday’s close and has doubled in the past three years. Acacia went public in May 2016 at $23 a share and its stock surged that year to more than $120.

Cisco’s latest acquisition makes chips and machines that help translate optical signals into electronic data. Acacia’s products are used to speed the flow of information around data centers and telecommunication networks.

The new capabilities may help Cisco make more headway selling gear to hyperscale data center owners such as Amazon.com Inc. and Alphabet Inc.’s Google, the company said in a presentation. That’s an area where Cisco has struggled to win sales. If it doesn’t grab share in the market for optical systems, the expense of developing the components may prove burdensome and force it to keep selling to Acacia’s existing customers, many of whom are its competitors, according to Dell’Oro Group analyst Jimmy Yu.

During a conference call after the deal’s announcement, analysts questioned whether that will be possible as those competitors may balk at buying from Cisco. Acacia’s customers include Nokia Oyj, Huawei Technologies Co. and ZTE Corp., and Cisco accounts for about 18% of its revenue, according to Bloomberg’s supply chain analysis.

Bill Gartner, the head of Cisco’s optical business, said the deal allows the companies to more closely integrate their technologies and offer customers simpler solutions.

“We feel like having this technology in-house is the best way to do that,” Gartner said.

Under Robbins, Cisco has made a series of acquisitions aimed at bringing in software and services that will ease the company’s dependence on hardware. He’s trying to build more predictable, recurring revenue by offering customers the ability to remotely manage and monitor their networks in order to make them more efficient and secure.

Robbins has said that transformation will take time as many of the new offerings require customers to shift to newer hardware that will support advanced functions and services.

Cisco’s status as the biggest maker of routers, switches and other gear for connecting computers means its earnings are seen as a broad indicator of corporate spending plans. The company gets only a tiny percentage of sales from China, where it’s been largely locked out of the market, and in one way may be a beneficiary of the ongoing trade dispute, which includes U.S. government attempts to block purchases of equipment from one of its biggest rivals, Huawei Technologies Co. Still, if business spending is hindered by an overall economic slowdown caused by trade uncertainty, Cisco’s sales could feel a hit, analysts have said.

(Updates with description of Acacia’s technology in the sixth paragraph.)

--With assistance from Peter Elstrom.

To contact the reporter on this story: Ian King in San Francisco at ianking@bloomberg.net

To contact the editors responsible for this story: Peter Elstrom at pelstrom@bloomberg.net, Molly Schuetz, Andrew Pollack

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