Why the Marvell and Lumentum Megadeal Has Both Stocks Headed for Historically Bad Weeks

Dow Jones
18 hours ago

Marvell Technology on Monday said it plans to acquire Lumentum Holdings at a valuation of $115 billion. By Friday, shares of each company were on pace for historically poor weekly performances.

Marvell stock rose 4.1% to $139.05 on Friday while Lumentum advanced 4.4% to $531.60. The gains came as the artificial-intelligence trade was staging a bit of a comeback after a brutal selloff in the previous session.

Still, it wasn't enough to save terrible weekly performances for Marvell and Lumentum.

Shares of Lumentum had declined 37% this week by midday Friday and were on pace to log their worst ever weekly performance, according to Dow Jones Market Data. Marvell, meanwhile, had fallen more than 29% and was on pace for its worst weekly performance since the week ended March 30, 2001, when the stock declined 30.3%.

Part of the sharp decline for each stock this week was Thursday's AI trade bloodbath. Marvell stock fell more than 16% on Thursday and Lumentum tumbled nearly 19%.

But it's also part of a broader trend for both stocks, which have become intertwined since Bloomberg reported on Oct. 29 the two companies were discussing a merger.

Between Oct. 28, the day before the Bloomberg report, and the closing bell on Thursday, Lumentum lost $36.6 billion in market value, while $103.6 billion was wiped out from Marvell.

Put it together and the two stocks have shed more than $140.2 billion in market capitalization since Oct. 28. That's quite a signal that Wall Street isn't too pleased -- with the acquisition deal or the AI trade.

The selloff has also called into question the valuation of Marvell's all-stock offer for Lumentum, even as many Wall Street firms believe the merger makes strategic sense could create a leading AI connectivity "pure-play."

At Oct. 28 prices, the acquisition implied an enterprise value of $115 billion for Lumentum and consideration of roughly $1,132 per share -- a 24% premium to Lumentum's closing price of $913.95 that day. Lumentum shareholders will receive a fixed 4.5 Marvell shares for each Lumentum share under the acquisition deal.

Lumentum stock, however, closed on Thursday at $509.70 and was 55% below that $1,132 a share valuation.

There's no doubt that the acquisition is a bet on the continuation of surging AI demand and the buildout to support it.

But there's nothing guaranteed on that front. Concerns have risen on Wall Street around the massive amount of spending needed for AI infrastructure and the possibility that the Democratic Party's big win in the midterm elections could mean heightened AI buildout regulation.

Investors haven't been shy about their discontent with Marvell's planned acquisition of Lumentum, and even Barron's argued that the valuation of the deal coupled with the AI trade coming under significant pressure were serious concerns.

Since then, with Democrats taking control of Congress, stocks with exposure to AI data centers have absolutely hammered. But Wall Street seems assured that the AI trade weakness is just a near-term blip.

"We expect near-term volatility in AI infrastructure companies over the next several weeks, given the higher win rate of pro-moratorium governors relative to prediction market expectations," William Blair analysts Tim Mulrooney and Jed Dorsheimer said in a research note following the midterms.

Morgan Stanley analyst Ariana Salvatore added in a research note there's likely to be near-term volatility that will weigh most heavily on AI stocks given the potential for more durable and broader restrictions at the local and federal level.

Salvatore, however, doesn't believe the negative sentiment in the stock market will last long.

"We expect the incremental headwind to be idiosyncratic, leaving the broader narrative around AI capex intact," Salvatore said.

Marvell and Lumentum shareholders better hope that's the case.

 

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