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Marvell Confirms $6B Deal to Buy Cavium

Iain Morris

Chipmaker Marvell has confirmed that it has agreed to acquire Cavium, another semiconductor manufacturer, in a $6 billion deal, in the latest sign of companies' urge to consolidate in the highly competitive components sector.

Marvell Technology Group Ltd. (Nasdaq: MRVL), which specializes in making storage chips for hard disk drives, had earlier been reported by Reuters and Bloomberg to have made a $6 billion cash-and-stock offer for Cavium Inc. (Nasdaq: CAVM), one of several US companies using chip designs from the UK's ARM Ltd. to build products.

Then, early Monday morning, Marvell officially announced it would acquire all outstanding shares in Cavium for $40 per share in cash and 2.1757 Marvell common shares for each Cavium share. That deal, which will leave Cavium shareholders with about one quarter of the combined company, values Cavium at $80 per share based on Marvell's share price on November 3, when press reports about a possible deal first appeared. (See Marvell to Buy Cavium.)

Cavium's share price was today up 7%, at $81.15, in pre-market trading at the time of publication. It was valued at $68.27 on the Nasdaq on November 3.

Marvell's own share price gained 1% in pre-market trading, rising to $20.50. It is up from $18.51 on November 3.

The company said it would fund the cash part of the deal through cash on hand at the combined companies as well as $1.75 billion in debt financing. It expects the deal to close in the middle of next year, pending regulatory and other approvals.

The combined company will generate about $3.4 billion in annual revenues and give Marvell an addressable market of more than $16 billion, it reckons.

Marvell's rationale is that a combination with Cavium will allow it to address a broader range of needs in the cloud data center, enterprise and service provider markets. It says the deal will be "significantly accretive" to revenue growth, margins and earnings per share within 18 months of its completion, and is also now guiding for between $150 million and $175 million in so-called "annual run-rate synergies" by the same deadline.

The takeover should certainly allow Marvell to reduce its exposure to some traditional business activities that are now in decline. Cavium has been on a growth spurt in the enterprise, service provider and broadband markets, and hopes to maintain its momentum as chipmakers using ARM-based gear try challenging Intel's monopoly in the market for server equipment. (See Cavium Targets Intel With Multicore SoC Line.)

Intel, the world's biggest chipmaker, is today thought to control up to 99% of this server market. ARM, which was last year acquired by Japan's SoftBank Corp. in a 24.3 billion ($32.3 billion, at today's exchange rate) deal, aims to increase its share of the market with its low-power, low-cost designs. (See SoftBank Muscles In on ARM in $32B Deal.)

Interest in using ARM chips as an alternative to Intel's X86 processors could augur well for Cavium, as well as ARM licensees including mobile giant Qualcomm Inc. (Nasdaq: QCOM), which itself has has been caught up in the chip sector merger-and-acquisition mania: Earlier this month, Broadcom Corp. (Nasdaq: BRCM) announced plans to acquire it in a hostile takeover bid valued at more than $100 billion. That deal, should it go ahead, would create the world's third-biggest semiconductor firm, behind Intel and South Korea's Samsung Electronics Co. Ltd. (Korea: SEC). (See Qualcomm Rejects $105B Bid From Broadcom.)

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During an earnings call in August, Marvell CEO Matt Murphy told investors that his company was focused on expansion into the cloud and data center markets and that its exposure to the hard disk drive notebook segment then accounted for only about 15% of total revenues.

Thanks partly to the take-up of products using solid state drives, Marvell was able to report a 1.2% year-on-year increase in sales, to nearly $605 million, for the three months ending in July. It has yet to publish figures for the three months ending in October but expects to generate revenues of between $610 million and $620 million as well as earnings per share of between $0.32 and $0.34 -- above the mid-point of guidance it provided in August.

During the quarter ending in July, sharp cost-cutting activities fueled a huge increase in net profit, which soared to about $165 million, from just $51 million in the year-earlier quarter.

Cavium has thrived thanks to growing demand for its products in the enterprise, service provider, broadband and consumer markets. Buoyed also by its takeover last year of a networking infrastructure company called QLogic, it reported a 50% increase in sales during the three months ending in September, to nearly $252 million, compared with the year-earlier period. (See Cavium Spending $1.3B on QLogic.)

The company is still running up losses but these narrowed significantly in the recent quarter to just $6.2 million, from $14.4 million a year earlier.

Iain Morris, News Editor, Light Reading

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