© AFP via Getty Images Cisco Systems Inc.'s proposed $2.6 billion merger with Acacia Communications Inc. could be destined for court after Acacia announced Friday that it was terminating the agreement on grounds that Cisco disputes.
Acacia disclosed Friday morning that it plans to terminate its merger arrangement with Cisco because the deal had yet to receive approval by Chinese regulators by Friday, which was the extended deadline. Cisco disagrees with Acacia's stance, arguing in its own release that China's State Administration for Market Regulation, or SAMR, informed it Thursday that Cisco's submissions were "sufficient to address the relevant competition concerns."
"Companies try to get out of mergers all the time and it usually has nothing to do with the thing they cite as the reason for getting out of it," said Larry Downes, project director for the Georgetown Center for Business and Public Policy.
Cisco is looking for a court resolution to the dispute and a court order that would require Acacia to go through with the deal. Whether or not Acacia's reasons are deemed valid by the courts depends on the facts, Downes said, such as when the Chinese regulators offered approval and if the approval they provided is deemed sufficient in regards to the terms of the merger arrangement.
Raymond James analyst Simon Leopold noted the vagueness of the information disclosed thus far.
"Cisco was notified by SAMR that the agency has determined that Cisco's submission is 'sufficient to address the relevant competition concerns,' but is this really approval?" Leopold asked in a note to clients.
Acacia noted in a Securities and Exchange Commission filing that it would not be entitled to a $120 million breakup fee as laid out in the companies' initial merger arrangement, announced in July 2019. That breakup fee was subject to several conditions, including that Cisco hadn't waived a "requirement to obtain required regulatory approvals for consummation of the merger." Since Cisco did waive that requirement, Acacia would not get the breakup fee upon deal termination.
The dispute between Cisco and Acacia may eventually go to trial or the companies could reach a settlement beforehand, offered Martin Gaynor, a professor of economics at Carnegie Mellon University's Heinz College. Typically the specifics of settlements are not made public, he said.
It's hard to know how aggressively Cisco will push to make the merger go through, Downes said. "If they think they're getting a better deal than when the merger was announced, they may pursue it in litigation," he told MarketWatch.
Shares of Acacia gained 9.9% in Friday's session while shares of Cisco were up 0.2%.
"While it is in Cisco's best interest to complete the Acacia deal on the original terms, we are unsure if it can be completed at the $70/share proposed takeout price given that Acacia is currently trading above $80/share," Evercore ISI analyst Amit Daryanani wrote in a note to clients. (The stock traded as high as $86 in Friday's session before closing at $79.60.)
He rates Cisco's stock at outperform with a $54 target price.
Raymond James' Leopold wrote that "Acacia's decision to walk away may reflect several possible factors including perhaps an effort to renegotiate terms." He thought the deal made sense for Cisco, but said it might be yet another victim of U.S.-China tensions.
"China has little to win by approving the deal, and can kill it by withholding/deferring approval," he wrote. "Given the restrictions on Huawei, we suspect that ZTE, a leading Acacia customer, becomes more important for China. Allowing a material ZTE supplier to become part of a large Western global competitor makes little sense."
He has an outperform rating on Cisco's stock, which has risen 14% over the past three months as the Dow Jones Industrial Average has added 10%.
Acacia hasn't addressed investors directly since the 2019 deal announcement, but the company scheduled a conference call for Monday at 5 p.m. ET.