LITC

By Nora Redmond

Shares in Lumentum Holdings climbed 5.5% in premarket trading on Thursday.

Shares in Marvell Technology have tumbled after a report that the chip company is close to buying optical-networking technologies manufacturer Lumentum Holdings. But analysts say the potential combination could make a lot of sense.

Marvell's stock (MRVL) dropped 12% in Thursday's premarket trading to $221.70, while Lumentum (LITE) advanced almost 5.5% to $964.

Bloomberg reported Wednesday that the semiconductor giant is close to acquiring the San Jose, Calif.-based company, whose components are used in data centers, according to people familiar with the matter. They added that an announcement could come next week, but a final agreement had not yet been reached and would be subject to Chinese and U.S. regulatory approvals.

Lumentum is a rival to Marvell, which also provides optical products and has become a major beneficiary of the artificial-intelligence build-out.

Marvell Technology and Lumentum did not immediately respond to MarketWatch's requests for comments.

"We think a potential combination makes strategic sense given the highly complementary product portfolios," analysts at RBC Capital Markets, led by Srini Pajjuri, wrote in a Wednesday note, adding that they expect the optical interconnect market to grow at a faster rate than total data center capital expenditure in the next two to three years.

But they also said that Lumentum is a key customer of Marvell's digital signal processors. If the deal closes, it could affect the chip company's current high market share of between 60% and 65% as alternative suppliers could be sought out.

The analysts added that investors may wonder if a combination is necessary given Marvell's current growth trajectory, but noted the company has a strong track record of integrating acquisitions.

A team at Raymond James, headed by Simon Leopold, said a possible deal would have "industrial logic," where optics have become increasingly important to Marvell's business. They said a combination could also help generate modest cost and sales synergies, and some customer synergies, including Google.

Analysts at Stifel, led by Tore Svanberg, wrote in a Thursday note that while gross margins would likely initially take a hit, they would then stay within Marvell's long-term target range of between 56% and 59% and possibly even surpass it.

"Marvell could then become the systems-connectivity, codesign supplier of both semiconductors and optics in scale up, scale out, and scale in connectivity," they wrote.

-Nora Redmond

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10-29-26 0905ET