Morgan Stanley: Rumored Marvell acquisition of Lumentum: optical interconnect integration is attractive, but price and customer conflicts are obstacles

Where do the deal talks stand?

Bloomberg reports that Marvell may be close to acquiring Lumentum. The two sides have not reached a final agreement, and a potential deal could see progress as early as next week. Morgan Stanley says neither company has commented publicly.
Morgan Stanley believes an acquisition would be a strong positive signal for the outlook for co-packaged optics (CPO), but whether a deal can be reached and its final terms remain subject to negotiations between the parties.

Marvell specializes in optical digital signal processing chips (DSPs) and connectivity solutions, while Lumentum provides lasers and photonic devices. Morgan Stanley believes combining them could allow Marvell to offer more products for each optical link and optimize power consumption, performance and cost together.
As optical architectures shift toward near-packaged optics (NPO) and CPO, electronic and optical devices need to be integrated more closely. Control of more photonic technology could also hedge against the risk of declining DSP value content or lost market share as architectures change.
Lumentum’s light sources could complement Marvell’s previous acquisition Celestial AI and help it access increasingly scarce indium phosphide (InP) laser capacity. Celestial AI expects revenue to begin ramping in the second half of fiscal 2028.

Lumentum has a substantial share of the optical components used to scale AI networks. Morgan Stanley estimates that the company’s gross margin has risen by more than 20 percentage points in total over the past eight quarters, benefiting from tight InP supply and the introduction of higher-gross-margin products such as optical circuit switching (OCS).
The company recently said its capacity was sold out through 2028. Morgan Stanley therefore speculates that available capacity at its Greensboro plant, scheduled to come online in 2028, may also be largely sold out.
But the stock has risen more than 900% since the start of 2025, and the valuation cited in the report is approximately 30 times trailing 12-month revenue and 15 times forward 12-month revenue. The bank notes that current gross margins are well above historical levels; if competition from China intensifies or vertical-cavity surface-emitting lasers (VCSELs) capture more future demand for network expansion, margins could normalize once supply and demand come into balance.

Marvell’s DSP customers include optical module makers that compete directly with Lumentum. Morgan Stanley worries that an acquisition could weaken Marvell’s neutrality as a supplier, potentially jeopardizing its existing DSP business.
Lumentum’s manufacturing business is more capital-intensive and cyclical. Its gross margin is affected by factory utilization, product mix and prices, and is also below Marvell’s long-term target. Optical demand and pricing are exceptionally strong at present, and Morgan Stanley questions the appeal of making a large acquisition at this point.
The bank expects a deal could require substantial stock consideration, creating dilution risk, and suggests that some technology and supply-chain benefits might be obtained through lower-cost joint research and development. Morgan Stanley maintains hold ratings on Marvell and Lumentum, believing Marvell needs to demonstrate that the acquisition’s incremental earnings power exceeds what it could achieve independently.