Intel Corp. (Nasdaq: INTC) is selling off a piece of its communications business, sending its cellphone and smart-handset chips to Marvell Technology Group Ltd. (Nasdaq: MRVL) in return for $600 million.

The highest-profile parts of the purchase, announced today, are two chips with names: “Hermon,” the PXA9xx processor found in the BlackBerry Blackberry 8700; and "Bulverde," the PXA27x chip used in the Palm Inc. Treo and Motorola Inc. (NYSE: MOT) Q, among other devices.

Intel is undergoing a 90-day internal review, after which it expects to sell off some businesses. The Marvell sale, expected to close in four or five months, represents the first big-ticket item to go.

There's been some speculation that Intel might sell off the IXP line of network processors and its optical-networking chips as well, but analysts aren't convinced that Intel is that discouraged with telecom. (See Will Intel Trash Telecom?)

Marvell could pick up "the vast majority" of the 1,400 employees associated with its purchase, CFO George Hervey said on a conference call with analysts this morning. Marvell didn't discuss layoffs, but some cuts would seem likely: Intel manufactures the chips itself and will continue to do so for Marvell, but over time, Marvell expects to move production to foundries.

"We expect significant headcount cuts," writes Needham & Co. analyst Charlie Glavin in a note issued today, adding that previous Marvell acquisitions saw attrition of 25 to 50 percent.

The sale brings Marvell into the cellphone business, where it hasn't managed to produce chips to rival those of Broadcom Corp. (Nasdaq: BRCM), Qualcomm Inc. (Nasdaq: QCOM), or Texas Instruments Inc. (NYSE: TXN). Hervey noted that the businesses acquired from Intel are picking up about $100 million per quarter in revenues.

The catch is that Marvell now faces tough competition from those big names. "The handset market is getting very crowded, and we believe Marvell is late coming into this market," Glavin writes. "While Intel’s focus has been on the high-endsmartphones, MRVL made it clear that it would develop newer products that compete in the mass market."

Moreover, the chips sell at lower margins than Marvell is used to. Marvell expects to take a 10 percent hit to earnings in its fourth quarter, which ends in January.

Investors didn't take kindly to that news. Marvell stock fell $6.11 (12%) to $45.79 in late morning trading. Intel was up 4 cents (0.2%) at $18.22.

On the plus side, Glavin notes that Marvell is picking up some 3G and HSDPA basebands still in development. Marvell, which was unable to produce its own 3G basebands, could end up integrating those chips with its other wares -- wireless LAN parts, for example -- to cater to next-generation handsets, he writes.

The sale was made for $600 million in cash, but Intel has the option to turn $100 million of that into Marvell stock.

— Craig Matsumoto, Senior Editor, Light Reading