Narrow-moat Cisco (CSCO) announced its intention to acquire Acacia Communications (ACIA), a vendor of high-speed coherent optical interconnect products, for $2.6 billion ($70 per share) in cash. We view this acquisition in a positive light as Cisco bolsters its optical portfolio for applications outside of short-range data center interconnects. Acacia's technology gets Cisco ahead of the shift toward using pluggable optical modules instead of chassis-based options, and access to areas such as the metro, long-haul, and undersea markets. With traffic expected to continuously grow at an alarming rate with higher bandwidth items demanded at faster rates alongside 5G network buildouts, we believe Acacia helps Cisco capture more of the expected demand. More information regarding financial impacts are expected around the closing period in the second half of fiscal 2020, and we are maintaining our fair value estimate of $52 per share.
Cisco paid a 46% premium for Acacia's shares, or about 7.6 times Acacia's 2018 sales, which made up less than 1% of Cisco's fiscal 2018 revenue. Acacia had been on a downward trajectory since 2016, so we believe that Cisco was opportunistic to bolt-on technologies to its optical portfolio at this time. The shift toward pluggable optical modules is disruptive to Cisco hardware sales, but now the company can continue to be a holistic solution provider.
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Mark Cash does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.