Marvell Technology may have picked the worst time to decide to acquire Lumentum Holdings at a valuation of $115 billion.
The acquisition, announced early Monday, wasn't much of a surprise to Wall Street after Bloomberg reported last week the two companies were in advanced talks.
But now the details have been confirmed with Marvell agreeing to acquire Lumentum in an all-stock transaction that values Lumentum at $115 billion, or $1,132 a share per Lumentum share. The price tag represents a 24% premium from the closing price on Oct. 28, the day before Bloomberg reported the two companies were discussing a merger.
Marvell stock fell 7% to $182.66 on Monday after ending Friday down 10%. Lumentum stock, meanwhile, dropped 11.85% to $741.08. Shares of Marvell have declined 22% since the closing bell on Oct. 28.
There's no doubt that the acquisition is a bet on the continuation of surging artificial-intelligence demand and the buildout to support it.
The merger also comes at a time when, to put it mildly, the AI trade is in trouble as Wall Street concerns have spread from the so-called neocloud sector to the Big Tech companies that have been the engine for the AI buildout.
The tech-heavy Nasdaq Composite declined 5.3% last month, marking its worst monthly performance since March 2025.
Sentiment has seriously shifted, especially with interest rates making debt much more of a risk even for companies with robust balance sheets.
"Until now, investors have tended to focus on the neoclouds as one of the weaker links in the AI chain, while assuming that the hyperscalers had more than enough earnings from their legacy businesses to fund enormous AI investment and comfortably cover their cost of capital," William Blair analyst Richard de Chazal said in a research note Monday.
That has changed following earnings from Alphabet, Amazon.com, Meta Platforms, Microsoft, and others.
"This past week's volatility is indicative of investors asking those important questions, and becoming a little more skeptical of expected future revenue growth against the vast scale of investment taking place today," de Chazal added. "They are increasingly looking for diversification and protection."
Bank of America economist Claudio Irigoyen also was somewhat pessimistic.
"Investors are increasingly concerned about the AI trade, and the more capex keeps growing, the more risks loom. Will firms be able to monetize their investments, or could the speed of adoption disappoint?" Irigoyen said in a research note.
"The tightening in global financial conditions is also a first-order risk. AI capex and financial conditions are connected, with higher interest rates at least partly reflecting increased supply to finance AI investment," the economist added.
But Wall Street is divided on the question of the AI trade. A Citi analyst team led by Heath Terry said that to underestimate the Big Tech companies could be a mistake.
"We continue to believe that the market is underestimating AI-driven revenue growth at the hyperscalers despite upward revisions post-3Q results and ongoing infrastructure constraints," Terry said in a research note.
Citi indicated that combined revenue in the third quarter from Amazon Web Services, or AWS, Meta, Google, and Microsoft accelerated more than 25% from a year ago and that Big Tech capital spending plans implies about 30% combined revenue growth in 2027.
That's enough for the firm to remain optimistic about the chances for those Big Tech companies to more than capitalize on AI even as spending continues to increase.
Citi estimated that global AI spending will total around $1.7 trillion in 2027 up 64% from 2026 with the top four hyperscalers accounting for about 64% of the overall investment next year.
"We expect accelerating enterprise adoption to sustain the AI trade, despite bottlenecks around equipment, regulation, and financing," the Citi analysts said.
That would certainly be good news for Marvell and its $115 billion merger.
Marvell and Lumentum said the combined company's total addressable market is likely to expand to around $550 billion as the merger brings together two of the largest players in the optical-networking sector, which has become a key cog in the AI trade.
Ever-larger data centers require optical transceivers to efficiently transfer data by converting electrical signals into light. It's a fast-growing business in the AI boom.
Marvell makes the digital signal processors within those transceivers, while Lumentum produces lasers and other components.
"AI infrastructure is undergoing a fundamental architectural shift toward optical connectivity, creating an opportunity that comes along once in a generation," Marvell CEO Matt Murphy said in a media release.
But as risks loom and the stock market turns ever more pessimistic on AI spending, Marvell might have been several months late with its decision to make such a large bet on the AI buildout.
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