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Why Optical Networking Stocks Soared Today

Evan Niu, CFA, The Motley Fool

What happened

Shares of numerous optical networking companies have soared today, after networking giant Cisco Systems (NASDAQ: CSCO) said it would acquire Acacia Communications in a $2.6 billion deal that is boosting investor optimism across the sector. As of 3 p.m. EDT, shares of NeoPhotonics were up 7%, with peer Applied Optoelectronics enjoying gains of 13%.

So what

Cisco has agreed to pay $70 per share in cash for Acacia, a whopping 46% premium compared to yesterday's close. The acquisition will strengthen Cisco's silicon and optics portfolio by offering high-speed interconnect technologies across different types of networks, Cisco said in a presentation discussing the deal.

Optical networking cable

Image source: Getty Images.

Acacia is an existing Cisco supplier, and Cisco optical networking exec Bill Gartner said the deal will help the company address three primary networking challenges: increasing capacity of existing fiber infrastructure, reducing cost per bit, and leveraging automation to reduce operating expenses and mitigate human error.

"By integrating Acacia technology into Cisco's networking portfolio, we believe we can accelerate the trend toward coherent technology and pluggable solutions while accommodating a larger footprint of customers worldwide," Acacia CEO Raj Shanmugaraj said in a statement.

Both NeoPhotonics and Applied Optoelectronics offer similar products for high-speed communications networks. All three companies are fairly comparable in terms of revenue last fiscal year, although NeoPhotonics and Applied Optoelectronics are much smaller in terms of market cap. Both smaller companies are valued at a little over $200 million.

Company

2018 Revenue

Acacia Communications (NASDAQ: ACIA) 

$339.9 million

NeoPhotonics (NYSE: NPTN) 

$322.5 million

Applied Optoelectronics (NASDAQ: AAOI)

$267.5 million

Data source: SEC filings.

NeoPhotonics announced this week that it has started to ship in limited volumes its latest modulator chips that work with silicon photonics.

Now what

Cisco expects the transaction to close in the second half of fiscal 2020, and the company will continue to support Acacia's existing and new customers. Cisco has been on a buying spree, with Acacia being the company's third purchase announced this year. Cisco scooped up six companies last year, including Luxtera, which utilizes silicon photonics in integrated optics.

The deal -- and its considerable acquisition premium -- is making investors broadly bullish on the sector, potentially speculating that other companies could similarly become acquisition targets.

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Evan Niu, CFA has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.