Marvell to Acquire Lumentum in Historic $115 Billion Tech Deal

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0:24 Let's get some more reporting on that Monster M & A transaction. Ryan Gould joins us here, Bloomberg Deals reporter. Ryan, Marvell reaches $ 115 billion deal for Lamentum Holdings. This is just a huge dollar amount. What's going on here? What is Marvell trying to achieve?

0:41 So, Paul, this is essentially, as Marvell sees it, a doubling down on its relationship with both a crucial provider of optical solutions that we find in data centers. And also, I think, as one of the CEOs of one of the companies said on a network that won't be named this morning, and a direct quote from him, this is a doubling down on supporting NVIDIA. I mean, what is a chips deal today without NVIDIA? They're coming up everywhere.

1:06 NVIDIA backs both Marvell and Lumentum. These chips that, you know, Lumentum up until this point has made has become sort of a pure play provider of optical solutions that are so crucial to data center buildouts. Marvell has been trying to divert more into that area. Earlier this year, it acquired a private company called Celestial AI for about $ 5 billion all in upfront. So I think it kind of showed its hand then. But make no mistake, this is an absolutely enormous deal. I described it last week as sort of an audacious bet at M & A, take on M & A in 2026. If you think that we're a day out from the midterm elections and you've got someone, you know, doing probably one of the largest tech deals ever, if not one of the largest M &

1:48 A deals ever by equity value, I think it's quite gutsy.

1:53 Yeah.

1:53 It reminds me, fairly or unfairly, Paul, of TXU and Hilton in 2007, not so long before the financial crisis. Ryan, my question to you is Marvell, I'm looking at how many people it has at the company, 7,400 employees, Lumentum, based in San Jose, not far from Santa Clara, 13,757. Is this a transaction that's going to lead to massive job cuts?

2:17 I mean, you know, there are quite clear synergies that the companies have outlined. But I mean, when you think about bringing a company of momentum size under the roof of Marvell, I mean, you'd probably have to guess there would be some cost synergies based on labor for sure. But I don't think that's necessarily a surprise at M & A today. I think just as you think about some of the demands from a cost perspective on the top line, you know, semiconductors has typically been quite a CapEx intensive business.

2:44 And I think if you can sort of maybe optimize some of that on the cost level, you know, you probably wouldn't necessarily fault them for that. I will just say, though, I mean, these are two companies that have kind of been sort of operating on divergent paths for a while. And now to see them come together, for those of us who know semiconductors, it's very cyclical. But we've not really seen this. I mean, a few years ago, you wouldn't have thought about this deal happening at all. And here we are today sort of looking at this thinking, well, you know, if it weren't for these AI large language models, you you know, perhaps Marvell wouldn't have seen the types of gains it's seen in its stock price. Lumentum would

3:17 have become probably still, would have still been a sleeping giant. But yeah, M & A does funny things.

3:24 It's interesting.

3:25 About 30 seconds left here. This is an all stock transaction. So we have Marvell's stock down about five and a half percent and Lumentum's down about 10.6%. Is this just reflecting dilution or do you think, are you hearing anything in the marketplace that maybe people are not sure about this deal?

3:43 Paul, just quickly, I think there are a couple of things. This deal is going to basically take out, again, just to reiterate, an indium phosphide pure play player in Lumentum. There is now no longer really a sort of bet if you're a public equity investor on just that specific technology with this deal. So, that's one thing. The dilution is another thing. And you saw that the reaction of Marvell shares last week when we put out the exclusive story just on the deal talks. I think people are trying to just get their heads around exactly what this will mean for for them. Yeah. And I think just to close out here, on an equity basis, we've just done the calculation based on sort of proper share accounts.

4:19 And this does put the equity value, the implied equity value of the deal at $ 102. 6 billion. So comfortably the largest of the year.

4:28 Stay with us.

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4:50 Anthropic, the IPO prospectus, the S1, is about 326 pages, give or take. I think 96 of those pages were risk factors. And one of them is... There's no real law around this AI thing that could open the company up for some litigation risk. Matt Scheltenhelm, he's all over those 96 pages of risk factors. He's a media litigation analyst for Bloomberg Intelligence. So, Matt, if I'm anthropic, the law surrounding my business, the AI business, it's not that well defined. So how do I think about my risk there?

5:23 Yeah, as you said, Paul, this was a big part of the S-1 filing. A lot of discussion of what this could mean in terms of litigation exposure for the company, in terms of interference by the federal government, and in terms of what is the legal regime going to look like going forward for the entire AI world. And so that's sort of big questions facing the company. And we've seen it for Anthropic specifically already just in the last year.

5:56 In February, this administration designated the company a supply chain risk and the company's having to litigate over whether that was lawful. In June, the federal government put on these export control restrictions and made the company shut down its Mythos 5 and Fable 5 models. is that lawful? Is that the regime we're going to live in going forward where the administration can do this? Or are there going to be guardrails about how this works? And then the big questions, what if this stuff causes harm? And then can you sue over it? And how big is that risk?

6:33 There are no specific laws addressing these questions. We're applying old laws to very new technology, and the scale of potential damages is enormous. So huge questions facing the company in the legal space.

6:46 Yeah, these feel like unanswerable questions bordering on existential questions as well.

6:51 Well, I mean, if you cause the earth to cease and mankind to cease, that would be litigation risk, I would think.

6:57 Yeah, sure.

6:58 Whoever's left to lead the lawsuit. What does this mean, Matthew, for how OpenAI proceeds? I mean, I'm sure it's looking at this pretty carefully and thinking we have to do all this and more, or we just kind of follow what um, anthropic does in terms of, uh, the, all the potential risks laying it all out.

7:17 Yeah, I think, I think it's, it's all of this and more, and everyone's trying to figure it out right now and, and trying to, you know, disclose risks and, and to say, you know, one, one, one legal issue that comes up along down the road is did you fail to warn of potential risks? And you can, you can see legal claims in social media about that right now. Um, And you can envision a world where that comes up down the road for these AI companies. And so part of this right now is just disclosing the risk to try to dampen damages claims that could come later if the worst case scenarios do materialize. So I think right now it's in part lobbying at both the state and federal levels to try to push lawmakers to understand this

8:05 stuff and to try to land on a sensible approach for the business. But it's also trying to prepare for potential litigation if we don't go through legislatures, if we go right to courts and we have some sort of big, big incident that the courts are left to grapple with without any law on the books specifically addressing it.

8:26 So, I mean, from the company's perspective, given all that ambiguity out there, How can it protect itself realistically? I'm trying to side with the issuer here because, I mean, they are breaking new ground and potentially doing amazing things here.

8:41 What can they do?

8:42 Yeah, so when you think about, you know, think maybe the claim is negligence. And that's basically, did you exercise reasonable care? That's going to be the basic question that would go to a jury if there was some large-scale incident here. So as a business, what you're trying to do is to be careful, is to exercise reasonable care and to warn of these risks, to try to put in place preventative measures to prevent them from happening. And then if something does happen, eventually you can come in and say, look, sometimes bad things happen, but that doesn't mean we didn't exercise reasonable care. And so I think that's the best you can do without more, more precise guardrails in place is, is be careful and, and try

9:28 to anticipate what that litigation would look like, um, in the future and, and try to get in front of it.

9:36 What do you think in terms of legislation? I mean, um, Congress, if we are to believe the polls will be split or perhaps blue. President Trump obviously has veto power. States can do a lot more potentially. How do you think through all of this?

9:52 Yeah, that's that's sort of how I see it right now. I think the next two years, even if the Democrats do advance to control. the House and perhaps the Senate, it's going to be very difficult with President Trump having that veto pen over the next two years based on his comments that, look, all we need is me. I can control everything. We don't need Congress setting these standards.

10:16 That's not really a framework that looks like we're going to have serious discussions at the federal level over the next two years about the most logical way to regulate AI. I think so for that reason, the next two years, it's really going to be the states moving ahead, advancing ideas here. You may see California, New York, Colorado, states like that kind of pushing the ball forward on what makes the most sense. And those could start to pass.

10:44 And then Congress in 2029, when potentially we have a new president, could then get more serious about adopting those state approaches at the federal level.

10:56 Stay with us. More from Bloomberg Intelligence coming up after this.

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11:17 Earnings continue to come in today from Marriott International. They had some pretty good numbers. The stock is trading higher today, hitting a, it's up about almost 5% today, up 35% year to date. It's a 52-week high, and it's an all-time high. So some good numbers out of Marriott. Let's break it down with Jody Lurie. She's the senior credit analyst for Bloomberg Intelligence. Jody, what's Marriott saying about their business these days?

11:46 So, Paul, I think what's so interesting about Marriott is we are seeing that that higher-income consumer is benefiting companies like Marriott. Even stripping out the effects of the World Cup, which is substantial, Marriott seems extremely optimistic about 2027 with rev par of 3% to 4% or 3.5% to 4.5%.

12:03 And that's compared to 4.5% to 5% for 2026. Of course, they are seeing some of the effects of the Iran war and other things at play. But by and large, we were a little bit surprised, I would say, with how optimistic management was.

12:27 I'm looking at the balance sheet because I did go through the Chase Manhattan Bank credit training program back in the day, so I know what I'm doing.

12:34 I look at.

12:35 Net debt of about $ 17 billion and.

12:37 EBITDA of about $ 6 billion. That's a leverage ratio of three times. I'm happy with that. Are you happy with that?

12:44 I think that's in line with what we see as the low end of their peers. If you compare it to Choice, which targets to be in that three to four times range, I mean, Marriott is below that. Choice is at 3.2 times. And so. But what's key for Marriott in particular is they like to access the commercial paper markets, the short-term markets. And in order for them to do so, they need a mid-level BBB rating to have that short-term rating. So if you think about it from that perspective and they want to have that access, they're going to continue keeping their leverage low, even if they're giving back $ 4. 8 billion in share buybacks and dividends.

13:23 Jodi, what's kind of the....

13:26 Capex and a maintenance capex for a company like a marriott and these other hotels because it seems like they're always upgrading their existing hotels refurbishing them uh maybe even building new ones what's kind of the maintenance capex for these companies I.

13:41 Mean, it's sort of interesting when they're a management company because so much of what they have isn't actually owned.

13:48 Right.

13:48 That's right.

13:48 They're the management model.

13:49 It's managed.

13:50 It's fees.

13:51 Exactly. It's an asset-light model. So because of that, a lot of that is passed on to the owners of the property themselves. That said, what we find particularly interesting is in times of stress, Marriott, Hilton, Hyatt, they will lean on their value as... higher rated companies and really substantial companies in the industry to help out those owners in terms of offering borrowing capabilities. So when we saw a few years ago with the risk of small banks, the run on small banks that we saw with Silicon Valley and all those, Marriott was very upfront about saying, hey, we're going to step in and offer these intercompany loans where we need to to keep the growth of these properties and also the refurbishment of these properties.

14:44 So what are the Marriotts of the world? What are they saying about just demand here, U.S. versus kind of rest of the world, if that's how they think about it?

14:54 So U.S. and Canada in particular were strong this year, and that's partly an effect of the World Cup. But overall, I think they're relatively optimistic about the U.S. You know, they did make comments about Europe that I found particularly interesting, but they obviously were talking a bit about the Middle East and how that is going to continue being a little bit of a tale of a headwind for the tailwinds that they're seeing elsewhere. So it is affecting a bit of the Europe and elsewhere area. And so that I think is going to be continuing to be a lagger.

15:30 I mean, it seems like, I don't know, we've seen so much over the last five, ten years of investment, hospitality investment, entertainment investment in the UAE.

15:41 And just that part of the world over there.

15:44 That's got to be, a lot of these companies have to be hitting the pause button here and saying, we've got to rethink this maybe.

15:50 So they're not actually hitting the pause, Paul, because if you talk to Wynn, for example, which we've talked to them a few times about this, they're continuing business as usual. Now things are going to be more expensive. You know, the, the property that they're building, the first of its kind in terms of a gaming property in the UAE, they are anticipating that it's going to be a little bit more expensive. It's going to not start generating the EBITDA that they anticipate until later into next year. And so that's a little bit of a tail of a, of a headwind for them. I keep wanting to say tailwind for some reason. Um, I don't know what's going on.

16:25 I think it's an earnings sort of mix-up thing going on. But I think– so I think for someone like Wynn, which is really, really exposed to the UAE in particular, dumping a lot of capital into that new, brand-new, large facility– I think they're sort of expecting that as much as you might see a little bit of a drop off in attendance and in terms of volumes, eventually it's going to rebound. This is a short term event. We are seeing that at least locally people are participating. Now, what I would compare that to, though, is if you look at Macau and you look at how MGM did in Macau and how Las Vegas Sands did in Macau, there are some alarming components here. if you think of that China population that may or may not be pulling back

17:13 a bit.

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17:36 Law firms, big law firms are. I don't even know how to describe it. The world is falling apart for them.

17:44 Yeah.

17:44 I mean, this one in particular, Wild.

17:46 Wild Gottschall, which is very well known for corporate restructuring, finds itself having to kind of restructure its own business. And in this case, it looks like it may end up shutting down completely. I want to bring in our next guest to talk about what's going on in big law. Roy Strom is our Bloomberg Law Correspondent. And what's happened in Wild Gottschall seemed like it happened suddenly. but it actually had been brewing for a little bit because there are defections of some high-profile lawyers. And it all comes back to the idea that a law firm is really made up of its lawyers, and if its lawyers decide to jump ship, that puts the whole firm at risk.

18:27 That's absolutely correct. And while Gottschall's, of course, become a case study, and last week the firm did decide to wind down after a significant number of defections that have occurred For more than two years, really, but just ramped up recently. And the firm's probably biggest affection came in September when a very prominent, very successful M & A partner, a partner by the name of Mike Gaiello, announced that he was going to join Cravath, which is, of course, a rival M & A shop. And he was not alone.

19:01 He left after a series of significant departures from the firm's private equity practice and After Mike left, the firm tried to sort of rally around itself and made some new hires and felt like they still had an opportunity to grow and compete. But this sort of psychological phenomenon caught hold as they compare it to a run on the bank where sort of no partner can guarantee that the person next to them will stay. And it becomes increasingly tenuous. And it was a very, very difficult time, I think, for the people involved in making that decision last week. to wind down and ultimately end a 95-year-old law firm history.

19:43 Yeah. I mean, this is just a blue-chip name on Wall Street law firms. One of the ways that investment banks keep employees is stock compensation, tie their future to that of the firm. Any structure like that in the legal business?

20:03 There is currently no structure like that for these large law firms. There are basically rules around who's allowed to own law firms. And right now you have to be a lawyer to own a law firm. There are efforts underway in different sectors of the industry to allow for sort of outside investor to basically own a sort of ancillary services agreement or ancillary services company. Excuse me, I don't know.

20:34 If you still got me there.

20:35 Having spent a career on Wall Street, having been through many down cycles, they try to jam these stock-like instruments down your throat instead of cash. The net result is it does tie your loyalty a little bit to that firm. I would think there would be some kind of structure they could think of that would replicate an ownership incentive.

20:56 I think that will probably be one of the questions going forward. I'm really uncertain if that will work. There's a lot of barriers regulatory-wise in terms of the way lawyers as a profession govern themselves. So far, states have been responding to this sort of increasingly in a protective way. There's concern over the idea of outside investors owning law firms.

21:24 And while perhaps it could do what you suggest, I think there's other reasons that lawyers are wary of it.

21:31 So, Roy, while, gosh, what happened here feels like it may have been the way that they managed some of their talent, but are all big law firms at risk of the same thing, their top talent going somewhere else and taking their teams with them and leaving a big void in their existing firm?

21:54 In theory, yes, all law firms are susceptible to that. And the industry has seen a lot more what they call lateral partner movement between law firms. But at the same time, I think it would be an exaggeration to say that every law firm today is somehow more unstable than it was before. last week. This was a real place with real people making real decisions about their future.

22:17 It was a human story about disagreements between those people and sort of a sad and tragic story of the way that they kind of failed to collectively pursue those ambitions, I would say.

22:31 So is this going to set off, this being the shuttering of while, is that going to set off a kind of a feeding frenzy amongst the competitors for talent?

22:42 Oh, yeah.

22:42 Oh, yeah.

22:43 That's well underway. Yeah, that's well underway. I mean, the partners who are at that firm who have clients will find it fairly easy to find roles at competitor firms. This is something law firms do all the time. They take in new talent, they get them strapped up, and the work continues. I mean, even the lawyers who remain at Weill over the next 90 days are working on client matters. There are wild gotcha lawyers, I'm sure, in courtrooms today, meeting with corporate lawyers. The firm goes on as this process continues. At some point, it will be over.

23:19 But it's a complex thing. But I think the hardest thing will be for the younger associates and, of course, the staff as well. Those people are probably most at risk, most vulnerable here.

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