China Could Be A Roadblock In Cisco's Acacia Acquisition

Cisco (NASDAQ:CSCO) has announced its agreement to buy Maynard, Massachusetts-based Acacia Communications (NASDAQ:ACIA) for $70 a share, or $2.6 billion net of cash and marketable securities. That’s a 46% premium to Acacia’s closing price on Monday.

The all-cash deal, if it goes through, will be the biggest acquisition since AppDynamics, which was taken for $3.7 billion. Over the past year, Cisco also added Duo Security for $2.35 billion in cash and stock and Luxtera for $660 million in cash and assumed equity.

Cisco has for several years, been diversifying beyond its hardware business, as a more software-centric approach to solving network issues have started to make more sense and as competitors mushroomed to eat into its revenues.

Acacia has coherent optics technology, which facilitates faster data throughput in optical networks and is therefore of great strategic importance in the industry’s move to take on transport speeds of 100 Gbps or more. The company’s optics, digital signal processing technology, transceivers and other gear primarily cater to data center operators and telecom companies that are always pressed to offer faster data transfer even as the volume of network data continues to increase.

This therefore makes the portfolio a perfect fit with Cisco’s cloud, service provider and enterprise customers. Since Acacia has quite a concentrated customer base with 74% of revenue coming from its top 5 customers, there’s great scope for cross selling to Cisco customers.

In fact, Cisco will be able to use Acacia products throughout its network for enhanced throughput for its customers. It will also help customers looking to simplify operations and reduce network complexities to transition from chassis-based systems to pluggable technology. The company will of course also support Acacia’s current customers.

The acquisition will close in the second half of Cisco’s fiscal 2020 ending in June provided that it gets the necessary regulatory approvals. That’s where things could get tricky because Acacia’s largest customer is China’s ZTE (HK:0763), and the company generates 29% of its revenues from China (Thailand accounts for another 20%, with Germany, U.S. and other countries contributing 17% each, according to Bloomberg).

So Cisco may require Xi’s blessings and that may not be forthcoming, given trade tensions with the U.S. and the fact that ZTE products were even banned in the U.S. between May 15 and July 13 of 2018.

Cisco has a Zacks Rank #2 (Buy) while Acacia is ranked #3 (Hold). Ericsson (NASDAQ:ERIC) , Dropbox (NASDAQ:DBX) and Alteryx (NYSE:AYX) are other options. You can also see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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