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Cisco (CSCO) to Acquire Acacia Communications (ACIA) for $2.6 Billion

Zachary Stutler

Cisco Systems CSCO announced early Tuesday that it has entered into an agreement to acquire Acacia Communications ACIA for approximately $2.6 billion net of cash and marketable securities. Cisco agreed to pay $70 per share for the Massachusetts-based company. The acquisition is expected to close during the second half of Cisco’s fiscal year 2020 (Cisco will begin its fiscal 2020 in August).

Cisco is set to pay what amounts to a 40% premium compared to ACIA’s closing price on Monday. The news caused Acacia stock to surge over 35%, to help bring it to a new 52-week high of $66.24. Meanwhile, Cisco stock was up less than a percent as the acquisition is the tech giant’s third this year, and is relatively small compared to Cisco’s size.

Overview

Cisco provides a variety of products vital to computer networking, and primarily sells to other businesses. Acacia is an optical networking technology company. This means it can provide companies with products to optimize long-term communication in terms of cost, performance, and bandwidth.

Cisco is currently an Acacia customer and the acquisition is said to allow the companies to better integrate technologies, according to Cisco executives. “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” Cisco executive vice president David Goeckeler said in prepared remarks.

The firm’s Acacia acquisition will also help Cisco bolster its optical system portfolio and allow it to better compete against competitors. Cisco said that it will continue to serve Acacia’s customers, while also integrating Acacia’s technology with its own in order to better serve its own customers and expand its customer base.

Some analysts, however, worry that the acquisition will cause Acacia to lose some customers as it currently supplies products to some of Cisco’s competitors such as Nokia Corp. NOK, Huawei Technologies, and ZTE Corp. ZTCOY.

Outlook

Before today’s significant jump, Acacia stock had gained 35.7% over the past 12 months, significantly outperforming the S&P 500. Cisco stock had also done similarly well over the same time period, posting 31.5% gains.

Cisco is currently a Zacks Rank #2 (Buy) and is also expected to post significant earnings and revenue growth over the next couple of years. Our Zacks Consensus Estimates call for earnings to surge 18.46% on the back of 5.12% revenue growth in fiscal 2019. Looking further ahead, fiscal 2020 is predicted to bring a further 11.32% earnings and 3.73% revenue growth over their respective fiscal 2019 expectations.

It is important to note that these estimates have not factored in the acquisition yet. With that being said, the effects of Acacia’s addition may be quite small, as its fiscal 2018 revenue was $339.89 million, compared to Cisco’s fiscal 2018 revenue of $49.33 billion. The financial benefits may not be that important to Cisco yet, but the company seems most intrigued by the technological integration Acacia will provide.

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