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Cisco sweetens Acacia deal by $2 billion

Cisco has agreed to pay $4.5 billion for Acacia, $2 billion more than the initial agreement in 2019. Cisco wants Acacia's optical products for its service provider portfolio.

Updated on Jan. 14, 2021

Cisco has agreed to pay nearly $2 billion more to acquire optical networking company Acacia Communications. The deal settles a legal battle in which Acacia sought to terminate the original agreement struck in 2019.

On Thursday, Cisco announced that the companies had amended the merger agreement to require Cisco to pay $115 for each Acacia share, which amounts to $4.5 billion. Cisco expects to complete the transaction by the end of March.

Once the deal is completed, Acacia CEO Raj Shanmugaraj and his employees will join Cisco's optics business.

"I am delighted that Cisco and Acacia have decided to come together in this mutual deal," Cisco CEO Chuck Robbins said in a statement.

Last week, Acacia notified Cisco it was canceling the original $2.6 billion agreement, claiming Cisco failed to get approval from the Chinese government before a Jan. 8 deadline. The notification set off a legal tit for tat.

Cisco obtained a restraining order from a Delaware court preventing Acacia from terminating the deal. The company argued it had received approval from China's State Administration for Market Regulation (SAMR) on Jan. 7.

On Monday, Acacia filed a counterclaim, arguing that Cisco had not received official approval from SAMR. On the same day, Shanmugaraj told analysts that its financial condition had changed since the company signed the deal with Cisco 18 months ago.

"I believe we are a stronger company today than we were in 2019," he said during the earnings call.

Cisco wants to control and own Acacia's optical transport systems that move data between data centers as far away as 1,500 miles. Cisco has sold the technology to communication and cloud service providers for years.

Guiding Acacia product development and owning its intellectual property would make Cisco a stronger competitor, industry observers said.

"Having a good packet-optical play would let them improve their capabilities in a pure network context," said Tom Nolle, president of technology consultancy CIMI Corp. "They could evolve their stuff to be more optically bound and, thus, perhaps steal some revenue from transport players like Ciena."

Cisco adapts to service providers

Since 2018, Cisco has tried to bolster sales to service providers by selling network operating systems separate from hardware and introducing network silicon that runs on commodity routers. According to Cisco, while sales have improved, service provider orders were down 5% in the previous quarter.

Acquiring Acacia "strengthens their position, no doubt," IDC analyst Rohit Mehra said. "But by no means is this so critical that it will weaken Cisco's broader position with the service provider segment. I don't believe that would be the case."

The COVID-19 pandemic has heightened demand for Acacia products by fueling revenue growth among cloud providers. Companies forced to have employees work from home during the pandemic have had to subscribe to more cloud-based services and applications to support those workers.

Acacia's coherent optical modules have sold exceptionally well during the pandemic, Shanmugaraj said. The technology converts data-carrying electrical signals from a data center into an optical format that can reach its destination in the outside world over a high-speed cable.

When it announced the deal, Cisco said it needed Acacia to provide in-house optical transport technology outside the data center. "Our optics business today is primarily addressing what's happening inside the data center," said Bill Gartner, general manager of the vendor's optical systems group.

Cisco announced the Acacia deal the same year it completed the acquisition of silicon photonics company Luxtera. Cisco expected that takeover also to help bolster its service provider business.

Antone Gonsalves is news director for the Networking Media Group. He has deep and wide experience in tech journalism. Since the mid-1990s, he has worked for UBM's InformationWeek, TechWeb and Computer Reseller News. He has also written for Ziff Davis' PC Week, IDG's CSOonline and IBTMedia's CruxialCIO, and rounded all of that out by covering startups for Bloomberg News. He started his journalism career at United Press International, working as a reporter and editor in California, Texas, Kansas and Florida.

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