A minor drama was acted out on Oct. 11 when Marvell Technology Group Ltd. (Nasdaq: MRVL) announced changes in the terms of an exclusive deal with Intel Corp. (Nasdaq: INTC).

Some investors jumped to the conclusion that Intel had finally developed its own PHY (physical layer) chips for its Gigabit Ethernet products and was thus pulling the plug on Marvell, its existing supplier. As a result, investors pulled their own plugs on Marvell’s stock, sending it sliding by $2, to around $12.

Not long afterwards, Marvell’s executives held a conference call to explain that Intel wasn’t pulling the plug. If anything, they said, it was the reverse. Marvell is backing out of its deal with Intel so that it can compete head-on with it and other companies, like Broadcom Corp. (Nasdaq: BRCM), in the fiercely competitive market for Gigabit Ethernet ports.

The Marvell-Intel arrangement dates back to 2000, when Intel was preparing a family of Gigabit Ethernet chips. Intel's PHY chip turned out to be unsatisfactory. With ambitious plans to promote the use of Gigabit Ethernet, Intel couldn't wait for the PHY to be perfected, so the company enlisted Marvell's help. Marvell now integrates its PHY with various Intel parts, gloms them into integrated devices manufactured at foundry Taiwan Semiconductor Manufacturing Company (TSMC) (NYSE: TSM), and sells the resulting manufactured devices back to Intel.

It's worked out well for Marvell, whose latest quarterly reports show Intel representing 13 percent of revenues. But everyone knew it was only a matter of time before Intel came up with its own PHY, allowing the chip giant to become a full-blown competitor to Marvell. Luckily, Intel had to warn Marvell 12 months in advance of canceling the companies' exclusive contract.

Which explains the minor panic on Oct. 11, when the 12-month notice was removed from the deal. As noted, some investors assumed Intel's PHY product was imminent, and that Marvell was about to lose the Intel business.

Quickly, Marvell convened a conference call to pacify investors. And it appears to have worked -- the stock recovered its losses the next working day.

Analysts seem to be buying into the story.

"We feel that investors had already discounted 2003/2004 sales and earnings a fair degree in anticipation of the eventual loss of Intel, and the 13 percent decline in Marvell’s stock on Friday [Oct. 11] was as much due to the clumsy handling of the announcement as the content of the announcement itself," wrote Clark Westmont of Salomon Smith Barney. Westmont did downgrade Marvell to Underperform, but only due to concerns about Marvell's hard disk drive business, which still represents more revenues for the company than does Gigabit Ethernet.

On the call, Marvell executives stressed that it was they, not Intel, who changed the agreement. Marvell was ready to go to market with Yukon, a new product targeting low-end desktops (see Marvell Announces Controller). But the company couldn't sell the product while shackled by exclusivity to Intel. The amended deal lets Marvell sell Yukon immediately, while Intel loses the 12-month warning requirement in exchange.

"We felt it was better to go to market now, because our product is more than ready for production," said George Hervey, Marvell's chief financial officer, on the call.

Intel will still produce its own PHY and its own integrated products, but those designs won't draw revenues from Marvell until 2003, Hervey said. And he noted that between now and then, extra Intel business could surface: "We're currently undertaking a development effort for another product for them."

— Craig Matsumoto, Senior Editor, Light Reading
www.lightreading.com