Morgan Stanley: Lumentum receives all-stock takeover offer, with optical component orders and capacity expansion in focus

What transaction has Marvell proposed?

Marvell and Lumentum have signed an all-stock acquisition agreement: Lumentum shareholders will receive 4.5 Marvell shares for each Lumentum share, equivalent to 1132 dollars per share and an enterprise value of approximately 115 billion dollars, a premium of 23.9% to the unaffected share price on 28 October.
On a fully diluted basis, the companies’ shareholders will own approximately 67% and 33% of the combined company, respectively. Management expects the transaction to close in the first half of 2028, although regulatory approvals could extend until August 2028.
Marvell expects to achieve more than 1 billion dollars in annual cost synergies after the transaction closes, mainly from cost of sales, and expects the deal to be accretive to non-GAAP earnings per share in the first year after closing.

Revenue for the first quarter of fiscal 2027 was 1.263 billion dollars, up 25.5% sequentially and approximately 0.6% above market consensus, but below the buy-side expectation threshold of approximately 1.28 billion dollars.
Profitability was stronger: non-GAAP gross margin was 53.2%, approximately 1.7 percentage points above consensus; operating margin was 42.3%, approximately 2.5 percentage points higher and also above the buy-side threshold of approximately 41%. Earnings per share were 4.57 dollars, approximately 9% above consensus.
The company guided for second fiscal quarter revenue of 1.6 billion dollars, approximately 7% above consensus and approximately 350 million dollars higher than the first fiscal quarter; earnings per share guidance was 6.05 dollars, approximately 19% above consensus. Non-GAAP operating margin guidance was 45% to 46%, implying further sequential expansion of approximately 2.7 to 3.7 percentage points.

Morgan Stanley believes Marvell’s optical digital signal processing, switching and connectivity solutions can be combined with Lumentum’s laser technology, indium phosphide manufacturing assets, and near-packaged and co-packaged optics businesses. The bank recognises the strategic rationale for the deal, but was surprised by the timing of its announcement before key businesses ramp up.
Lumentum disclosed that it had secured a second major near-packaged or co-packaged optics project backed by a purchase commitment of more than 5 billion dollars, further demonstrating customer demand for next-generation optical interconnect architectures. The company said pump lasers and optical switches are major sources of growth, with improving visibility into optical switch demand and the potential to generate billions of dollars in annual revenue.
Morgan Stanley noted that the company’s capacity is sold out through fiscal 2028; during transaction approvals, the focus is on expanding optical switch and co-packaged optics capacity to meet the associated target of more than 5 billion dollars.

Morgan Stanley believes the transaction validates the scarcity of Coherent’s optical technology and manufacturing assets, but more optical module materials will be concentrated with one supplier after the combination, and competition in optical modules remains a constraint for Coherent.
For Ciena, Lumentum is an important supplier of pump lasers and narrow-linewidth lasers; Marvell, meanwhile, competes with Ciena in ZR pluggable optical modules, and long-term reliance on a competitor for critical products could have adverse effects.
Morgan Stanley rates Lumentum Equal-weight with a price target of 1000 dollars, based on approximately 25 times calendar-year 2028 earnings and earnings per share of approximately 40 dollars. The bank finds the data communications business outlook attractive, but profit contribution, the timing of the optical switch ramp and the duration of the EML laser shortage remain key variables.