5 thoughts on Cisco's $ 2.6 billion deal with Acacia

Seven months after announcing the signing of a $ 660 million contract for the acquisition of optical components manufacturer Luxtera, Cisco Systems (CSCO) has signed an optical contract almost four times larger .

Network giant spends $ 2.6 billion in cash to buy Acacia Communications (CFIA), a developer of digital signal modules, components and processors (DSPs) for optical subsystems embedded in switches, routers and optical network equipment. The agreement carries a premium of 46% over the Acacia stock price and is expected to be finalized during the second half of the 2020 Cisco exercise, which ends in July 2020.

Here are some initial thoughts on the transaction:

1. Cisco's acquisitions embody the value of optics as a differentiator

As the amount of network traffic in cloud data centers continues to grow, both because of data transfer between end-user devices and data center servers, and because of the transfer of data between servers within the data center. same datacenter, network connection speeds increase in parallel. . Servers that can already have 10 Gbps optical connections use 25 Gbps connections, while the switches they interface with move from 40 Gb connections to 100 Gb connections. And within the core of the network and between Data centers, 100-GB connections are starting to give way to 200 and 400 GB connections.

Along with the more gradual transition to higher connection speeds in telecom networks, this trend is driving demand for more powerful optical transceiver modules in many different parts of a network. And as Acacia has often pointed out, it is not easy to meet this demand while meeting the demands of size and energy consumption of its customers.

At a teleconference organized to discuss Acacia's acquisition, Bill Gartner, head of Cisco, said that the acquisition of Luxtera, which has developed optical transceivers based on Silicon photonics has enabled the company to better meet the demand for 100 and 400 GB optical connections in data centers. , and that the Acacia agreement does the same for long distance connections, be it between data centers or over metropolitan or long distance telecommunication network routes.

2. Cisco sees Acacia's technology playing in industry trends

Gartner also argued that Acacia was helping Cisco cope with the changes that were occurring in data centers and telecommunication networks, from the use of standalone optical network boxes (called "cloud-based" solutions). a chassis ") to high-speed plug-in modules inserted into switches and routers. . While standalone optical boxes (provided by companies like Infinera (INFN) and Ciena, as well as Cisco itself) will still be needed for connections spanning longer distances, plug-in optics perform work at shorter distances, thus reducing the cost and complexity network.

Acacia mentioned in the past that modules supporting the new 400ZR standard for data center high-speed interconnects, such as its powerful AC1200 module, will help steer this evolution towards plug-in connectors. Like other Acacia modules, the AC1200 is based on proprietary chips, both a DSP processor for signal processing and a silicon photonic integrated circuit (PIC) for optical functions.

3. Contract Could Help Cisco Break More into the Cloud

In addition to network vendors such as Cisco, Acacia's customer base includes cloud giants that manage huge data centers and represent a growing percentage of IT hardware spend. Microsoft (MSFT) and Facebook (FB) are known to be two of these customers.

Acacia's exposure to proverbial hyperscalaries must appeal to Cisco, since these companies (in the aggregate) rely much less on Cisco switches and routers than traditional businesses; many rely heavily on local hardware designs and some are also major buyers of Arista Networks (ANET) switches. Although Cisco is engaged in leading cloud computing activities, its sales to service providers are still much more dependent on telecom operators and pay-TV providers.

4. Cisco insists that it will continue to support other OEM customers of Acacia

In 2018, Acacia sold its products to more than 30 customers and earned 52% of its revenues from three Cisco competitors: ZTE, Infinera and ADVA. Cisco represents only 14% of Acacia sales.

When asked if he would continue to sell Acacia products to such companies in the future, Gartner said his company was already selling optics to competing equipment manufacturers and felt that the company was not selling the same products. Acacia's purchase was "a natural progression" of this strategy. Nevertheless, it is not surprising that some of Cisco's competitors currently buying from Acacia are trying to reduce their dependence on the company following the closing of the acquisition.

5. More optical mergers and acquisitions could be considered

Suppliers of Optical Components and Modules Applied Optoelectronics (AAOI), NeoPhotonics (NPTN) and Inphi (IPHI) products are all up sharply in response to the Cisco-Acacia deal. Macom Technology Solutions (MTSI), a more diversified supplier of components and telecommunications chips, is also posting significant gains.

As I mentioned in an article about potential targets for chip mergers and acquisitions, which had been written shortly before the announcement of the Cisco-Acacia deal, the space Optical components / modules seem ripe for new mergers and acquisitions activities, provided that commercial tensions (and approval of transactions) continue to ease.

Such a transaction could be motivated not only by the attempts of its Cisco rivals to meet the Acacia and Luxtera agreements by making their own optical purchases, but also by the need for further consolidation of the sector.