Marvell's Cavium Deal Gets Rave Reviews

Shares of Marvell Technology Group Ltd (MRVL) rallied on Monday after it announced a deal to buy smaller chip company Cavium Inc. (CAVM) for $6 billion, as it continues a restructuring process built around increasing its presence in the networking markets. The deal was well received on Wall St., as analysts see the deal as making Marvell more competitive.

Marvell's offer of $84.15 for Cavium was an 11 percent premium above the stock price on Friday. Cavium shares quickly rose to close the gap, closing on Monday at $84.01, up $8.19 or 10.8%. Investors embraced the deal as Marvell shares also rose $1.30 (6.41%) to $21.59 on Monday, in a rare situation in which both the acquirer and the target rose together (often an acquirer's stock price will dip on the risk of the new investment).

Investor excitement focused on Marvell's capability to bulk up against larger competitors, including Broadcom (BRCM), which is a giant in the networking chip market that is now trying to buy Qualcomm. Cavium and Marvell can now team together to take on the growing networking chip giant. Broadcom is now the big fish in networking chips, and it could get even bigger if its proposed $105 billion merger with Qualcomm -- which has been rejected by the Qualcomm board -- progresses to a higher price.

"We can see the combined company driving revenue synergies in Storage and Networking, and benefiting from greater scale," wrote Jefferies analyst Mark Lipacis in a note to investors. He upgraded MRVL shares to a price target of $27 and expects the deal to improve earnings for the company with $150 million to $175 million in "cost synergies."

The companies look like a good fit. Marvell has large clients in networking, including Cisco (CSCO) and Juniper (JNPR), and it is looking to build its networking and wireless connectivity and diversify away from its chip business for storage devices, which represents the bulk of its revenue. Cavium is a fabless semiconductor company that also has many clients in networking, including Cisco, F5, and Juniper. Its Octeon line of chips is based on low-power ARM processors and targets applications in the datacenter and wireless markets. Chips with ARM cores have gained momentum in networking and datacenter markets, where there is a growing developer community using open-source applications tied to ARM.

It may not all be smooth sailing, however. Because Marvell is based overseas, the deal would require special regulatory approval from the Committee on Foreign Investment in the US (CFIUS), pointed out Bob Wheeler, a Principal Analyst with the Linley Group, in an exchange with me on Twitter.

"It's worth noting this deal requires CFIUS clearance because Marvell is not a U.S. company," wrote Wheeler. "Broadcom's decision to redomicile in the U.S. cleared the Brocade deal. Maybe $MRVL should follow suit."

Marvell Chief Executive Matthew Murphy took over a year ago, replacing former CEO Sehat Sutardja and President Weili Dai, the husband-wife team who co-founded the company. Marvell was under pressure from activist investors, including the Starboard Value LP fund, which were demanding an overhaul. Starboard succeeded in getting a new CEO on board and adding three new directors at the company. It's now clear that major changes have been successful -- at least in the short term -- at Marvell.