Marvell shares fell 12% as investors balked at reported talks on a megadeal with Lumentum.

Marvell Technology shares fell 12% after Bloomberg reported late Wednesday that the company is in advanced talks to buy the optics maker Lumentum. Lumentum's stock rose 2%. A deal could come as soon as next week.

Lumentum is worth about a third as much as Marvell, so a deal would likely mean issuing a large number of new Marvell shares. Owning Lumentum's lasers would also make Marvell a bigger rival to Broadcom and Coherent in AI networking. Lumentum's lasers would let Marvell sell more of the AI networking that Broadcom sells with its custom chips. They would also give Coherent, the other major optics supplier, a rival with Marvell's chips behind it.

**The price is the problem**

When the report came out, Lumentum's market value was about $83 billion, compared with about $221 billion for Marvell. Marvell had $3.93 billion in cash as of Aug. 1, so a deal would almost certainly be paid for largely in new shares.

Marvell has done this before. Its share count jumped after it bought Cavium in 2018 and Inphi in 2021, both largely with stock. The count is still climbing, reaching 921 million diluted shares in the quarter ended Aug. 1.

Lumentum also isn't cheap. It traded at 42 times forward earnings at Wednesday's close, before the day's jump and before any takeover premium. Its five-year average is 30 times.

For Broadcom, a rival gaining ground in its own lane is the concern. Broadcom's AI semiconductor revenue reached $16.7 billion in the quarter ended Aug. 2, up 221%. That is more than six times Marvell's total revenue in its latest quarter. When Broadcom reports in December, will management see Marvell catching up in optics?

Coherent faces a different question. Its revenue rose 34% to $2.05 billion in the quarter ended June 30, so it doesn't need a deal to grow. But with Lumentum inside Marvell, Coherent would be the major laser maker not tied to a chip designer. Will customers who want an independent supplier send it more orders? Its report in early November is the first chance to find out.

**Wait for the terms**

Investors are right to balk. Owning the lasers fits Marvell's strategy, but paying a rich price in new shares would make the deal better for Lumentum's shareholders than for Marvell's.

Nothing is signed yet, however, and better terms could change the math.