What happened

In response to announcing that it is acquiring a competitor, shares of Infinera (NASDAQ:INFN), a provider of telecommunication equipment, jumped as much as 12% in early morning trading Tuesday. Shares were up about 4% as of 10:10 a.m. EDT. The company also provided investors with a preliminary look at its second-quarter results.

So what

Infinera announced on Monday afternoon that it is acquiring Coriant, a privately held supplier of networking equipment.

Two people in suits are holding pens and looking over a contract.

Image source: Getty Images.

Here are the key details of the transaction:

  • The deal is valued at $430 million.
  • Infinera will pay $150 million in cash at closing, $25 million in the proceeding two quarters, and $55 million "over a period of years." Infinera will also issue roughly 21 million new shares.
  • Infinera will use the debt markets to fund the cash portion of the transaction.
  • Oaktree Capital Management (NYSE:OAK) -- which is a majority owner of Coriant -- will own about 12% of the combined company post-merger. Oaktree has agreed to hold 50% of its shares for at least six months and the remaining 50% for at least 12 months.
  • The deal will approximately double Infinera's revenue.
  • The company will gain access to five new top-10 global network operator customers and three new top-6 global internet content providers.
  • The acquisition is expected to strengthen both companies' competitive position.      
  • The deal will be accretive in 2019. 
  • A cost savings of $100 million has been identified. Total synergies are expected to reach $250 million by 2021.
  • Cash flow from the transaction is expected to pay back the deal within three years.

Here's the commentary that Infinera's CEO Tom Fallon offered investors:

"Acquiring Coriant is a fantastic opportunity, strengthening our ability to serve the world's largest network operators, accelerating our ability to leverage vertical integration and reinforcing our commitment to our long-term business model. This powerful combination immediately benefits our combined customers by delivering the innovative technology required for the next wave of network spending."

Infinera also provided investors with an update on its expectations for its second-quarter results:

  • Revenue is now projected to be "slightly higher than the midpoint of our previously reported guidance range."
  • Management also said that margins are expected to meet or exceed guidance across the board.

Wall Street is applauding the sizable transaction.

Now what

Shareholders can easily argue that a bold move like this is necessary to get Infinera out of the rut it has been in for the last several years. This single transaction promises to double the size of the business and give the newly created company a stronger competitive position, so it is understandable why traders are cheering today.

On the flip side, acquisitions are notoriously difficult to integrate and synergies are often far harder to realize than management promises up front. For that reason, I'm content to watch this story unfold from the sidelines. 

Brian Feroldi has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Oaktree Capital. The Motley Fool recommends Infinera. The Motley Fool has a disclosure policy.