The $2.6B Cisco-Acacia Deal: 2 Analyst Takes On The Optics

Tech giant Cisco Systems, Inc. CSCO proposed Tuesday to acquire optical company Acacia Communications, Inc. ACIA in a deal that is "more expensive than it appears," according to Bank of America Merrill Lynch.

The Analysts

Bank of America's Tal Liani maintained a Buy rating on Cisco with an unchanged $62 price target.

MKM Partners' Michael Genovese maintained a Neutral rating on Acacia with a fair value estimate lifted from $60 to $70.

BofA: Negative Side Effect

Cisco offered to acquire Acacia for $2.6 billion in what looks like a "defensive and offensive move," Liani said in a Wednesday note. On the offensive side, the deal will expand Cisco's switches and routers through adding new use cases and target markets, the analyst said.

On the other hand, Cisco is playing defense, as the acquisition offsets some headwinds like Network Functions Virtualization and whitebox routers, he said.

The acquisition will also better position Cisco to gain wallet share at webscale customers like Google, where it has minimal exposure today, Liani said.

The ultimate cost Cisco will pay is higher than $2.6 billion, as the deal will likely prompt some of Acacia's customer base that competes directly with Cisco to find alternatives, according to BofA.

MKM Partners: Major Implications For DSP

From a historic point of view, companies Cisco acquires typically "disappear" inside of Cisco and are merely featured within Cisco's products, Genovese said in a Tuesday note.

While Cisco said it will continue supporting Acacia's customers, the history "suggests otherwise," the analyst said.

The deal could have "major industry implications," including the potential end of the merchant Digital Signal Processing market, he said.

Merchant DSP allowed tier two and tier three optical systems vendors to "survive," so the deal is likely to "severely" weaken these vendors, Genovese said.

The small handful of large optical systems companies who make their own DSPs, including Ciena Corporation CIEN, will benefit, the analyst said.

Ciena stands out as a potential winner in the group, since Cisco's acquisition highlights that Acacia's 600G DCI products have "fading prospects" in the market, according to MKM.