The Information's TITV
00:15:08 · Akash Pasricha, Tore Svanberg
[00:15:08] S0: Right. The idea here, just to recap for folks, scale out and scale across, this is between servers and then between different data centers. Scale in and scale up is basically within the chip and then up inside the servers. Is that right? [00:15:26] S2: Exactly. So scale out is about connecting the racks together. Scale across is basically connecting data centers together. Scale up would be basically looking at racks that are quite large, quite tall. And then scale in would be millimeter type connections between compute and all the other various components within an AI rack, such as NIC cards, storage, memory, and so on and so forth. [00:15:56] S0: And so Lumentum, they play largely in the more microscopic scale in category. Is that right? [00:16:07] S2: No. So scale in today is all copper connections. [00:16:10] S0: Copper connections. Okay. [00:16:11] S2: But next generation scale is going to be based on optical. So today, Lumentum plays predominantly in scale out and scale across, which is where optical technology is used today. But as I mentioned before, as speeds continues to move higher and higher, copper runs out of steam as a connectivity medium, and therefore you are going to need optical connections. [00:16:34] S0: Got it. Okay. So now let's talk about the strategic logic then for this deal from Marvell. Sounds like Lumentum has some pretty forward thinking technology here that is going to become important. Do you think that this is a good deal for Marvell and ultimately we're going to get to the price, what do you think of what they paid for it?
00:16:56 · Tore Svanberg, Akash Pasricha
[00:16:56] S2: Yeah. So first of all, today, semiconductor companies and optical companies are not one on the same. They have different capabilities, different IP. But what's happening is that with the convergence of electrical signals and optical signals, or in this case, semiconductors and photonics, I think Marvell sees an opportunity to bring it all under one house and therefore be able to deliver some better architectures, some better products, and certainly some better performance solutions to their customers. As far as the price tag, yes, people look at the headlines like it's quite staggering. This is one of the biggest deals in semiconductor history. But let's not forget what's at stake here, right? We're talking about AI infrastructure, which is probably the place to be in technology over the next five to seven years. And what they are bringing to bear here is some of the most complex solutions you can find. I do understand for investors it's confusing again because we haven't really seen anything like this before. I think we're all used to thinking in verticals. But I do believe that by bringing these two competencies under one house, Marvell should be able to address next generation AI infrastructure in a much better way than what they are today. [00:18:16] S0: What do you think Lumentum shareholders are reacting to here? Because, I mean, look, typically a deal gets announced, the target, right? I mean, those investors get excited and the acquirer, those shareholders get nervous. Here, it was both of them getting nervous. So Lumentum's anxiety is what exactly?
00:18:16 · Akash Pasricha, Tore Svanberg
[00:18:16] S0: What do you think Lumentum shareholders are reacting to here? Because, I mean, look, typically a deal gets announced, the target, right? I mean, those investors get excited and the acquirer, those shareholders get nervous. Here, it was both of them getting nervous. So Lumentum's anxiety is what exactly? [00:18:37] S2: Yeah. I mean, I think this has more to do with the length of when this deal is going to close, right? So it's not going to close until first of the twenty eighth. There is going to be some regulatory scrutiny. So I think what Lumentum investors are worried about is, could this guild actually go through? Will it get approved? And given the timeframe, how long this is going to last, could that cause some disruption to their business model? Could competitors come in? Could customers get nervous? So I think that's what Lumentum investors are basically worried about. Do you think it'll go through? I personally think it will go through. There's no regulatory reasons why this wouldn't go through. Certainly if you just use the laws out there and the legality, there's no reasons why this should cause any antitrust anxiety. But keep in mind, this is going to need both China and US approval. As you know, politically, there's been some concerns there. But again, just purely from an antitrust perspective, I think the deal is going to go through.
00:18:37 · Tore Svanberg, Akash Pasricha
[00:18:37] S2: Yeah. I mean, I think this has more to do with the length of when this deal is going to close, right? So it's not going to close until first of the twenty eighth. There is going to be some regulatory scrutiny. So I think what Lumentum investors are worried about is, could this guild actually go through? Will it get approved? And given the timeframe, how long this is going to last, could that cause some disruption to their business model? Could competitors come in? Could customers get nervous? So I think that's what Lumentum investors are basically worried about. Do you think it'll go through? I personally think it will go through. There's no regulatory reasons why this wouldn't go through. Certainly if you just use the laws out there and the legality, there's no reasons why this should cause any antitrust anxiety. But keep in mind, this is going to need both China and US approval. As you know, politically, there's been some concerns there. But again, just purely from an antitrust perspective, I think the deal is going to go through. [00:19:44] S0: And as you think about this from a competitive perspective, so Marvell, obviously Broadcom is another big networking chip competitor for it. Does it help compete against that company? And we're going to talk as well about something you called out in your note, which is the competition that its customers might see it waging against it with this deal.
00:19:44 · Akash Pasricha, Tore Svanberg
[00:19:44] S0: And as you think about this from a competitive perspective, so Marvell, obviously Broadcom is another big networking chip competitor for it. Does it help compete against that company? And we're going to talk as well about something you called out in your note, which is the competition that its customers might see it waging against it with this deal. [00:20:06] S2: Yeah. So again, if you think about what I just mentioned before, this convergence between semiconductor technology and optical technology, there's very few companies that have all of that in house under one umbrella. Broadcom does. So they certainly had the same vision, the same view, and now Marvell obviously is going to be the second one. I think the alternative is still to buy discrete components from either side, but I think that's also one of the reasons why Lumentum decided to sell because they themselves, I think, were also looking at potentially bringing semiconductor technology into their house. That would have required obviously buying a lot of different smaller companies. I think that in itself would probably be a very long and tiring process. But the reality is that, yeah, now you only have two big players here that have the capabilities both in house. [00:20:58] S0: Okay. And what about the point you called out in your note here, the customer perspective on this? Marvell, I guess some of their customers compete with them on this stuff?
00:20:58 · Akash Pasricha, Tore Svanberg
[00:20:58] S0: Okay. And what about the point you called out in your note here, the customer perspective on this? Marvell, I guess some of their customers compete with them on this stuff? [00:21:09] S2: Yeah. So the one thing that we pointed out as potentially being a risk to this transaction is that basically Marvell is buying one small customer that does optical transceivers. And does that basically mean Lumentum's competitors who also buy from Marvell, would they get cold feet and look for alternative sources? Our understanding is that with this combination, the transceiver business would be less than 10% of revenue. While we thought that would be a bigger risk initially, when you put it into numbers and it's less than 10%, it does become less of a risk. But that's certainly something to keep an eye out here as this merger plays out. [00:21:56] S0: Okay. Last question for you. What do you think of the price that they paid? I know that depending on which share price you take, at what point in the story, you either get closer to $115,000,000,000 or closer to $80,000,000,000 You called this out as well last night. So whatever it is, what do you think of the valuation broadly, the per share price that they've put on it?