Analysts Applaud Marvell-Cavium Deal

　　Marvell will get an infusion of growth and Cavium may see a path to profitability from their proposed $6 billion merger. However, the more diversified chip maker that will result from the merger still faces relatively modest prospects for growth in revenues and profits, said analysts who applauded the deal.

　　Marvell estimated the two companies will have a total $3.4 billion in annual revenues growing at an average of 6 to 8 percent a year. That’s only slightly ahead of past projections for Marvell and the long-term average for the semiconductor industry overall.

　　The two companies have relatively minor overlap in products and customers. Executives said they have no plans for cutting products, but they do see savings in the first 18 months of up to $170 million from shared R&D and offices and reduced overhead.

　　Cavium brings nearly a billion-dollars a year in sales of a wide range of networking and comms chips and boards. Marvell’s products mainly consist of hard-disk and solid-state controllers, Ethernet switches and Wi-Fi and Bluetooth chips.

　　The two companies occupy a “middle ground below Broadcom, Intel and Qualcomm, but they are not small enough to be easily acquired,” said Linley Gwennap, principal of the Linley Group. He called the deal “overall positive,” noting both companies have embraced ARM cores, making it easier to merge and manage products lines.

　　Marvell ranks 33rd among top semiconductor makers with $2.4 billion in revenue, according to IC Insights. The two are a good fit, said Rob Lineback, senior analyst for the company, but he noted Cavium, focusing on fast growth, has “posted five years of annual net losses and is headed for a sixth straight net loss in 2017.”

　　The deal “creates cost-efficient scale and complementary product offerings that may boost future revenue growth potential,” Ross Seymore, analyst with Deutsche Bank, wrote in a research note. The 11-20 percent premium Marvell offered for Cavium “is a somewhat surprisingly attractive price” compared to typical semiconductor acquisitions paying 25-30 percent premiums, he added.

　　The deal comes at a time when Marvell’s Prestera line of Ethernet switches has “turned the corner and returned to growth” as second only to Broadcom, said Bob Wheeler, comms analyst at the Linley Group. He speculated a future Cavium XPliant switch could appear on the Prestera road map as its first programmable part.

　　For its part, Cavium has been running a distant third to Intel and NXP in embedded comms processors with its Octeon line, its strongest product. The future of Cavium’s ThunderX ARM server SoC is less clear under a cost-conscious Marvell, he added.

　　Cavium helps Marvell diversify beyond controllers and read channels for hard drives which make up the largest chunk of its business. The hard drive market will have a long tail with profits and growth crowded into the high-capacity segment for data center drives, said Tom Coughlin, veteran storage analyst with Coughlin Associates.

　　“Although hard drive units are declining, overall capacity shipped continues to rise…Tape drives are still around though people claimed for years they were dead, and now hard drives are likely moving into a similar position,” he said.

　　Marvell only recently competed an 18-month reorganization that shed nearly 40 percent of its employees, including its former chief executive Sehat Sutardja and president Weili Dai, his wife. The co-founders resigned amid investigations of accounting practices after revenues and profits fell from $3.6 billion and $435 million in 2015, respectively, to $2.6 billion with an $811 million loss a year later.

　　Last year, the company reported revenues of $2.3 billion and a $21 million profit. It essentially replaced its entire board and top tier management, naming Matthew Murphy, a senior executive from Maxim Integrated, its chief executive in June 2016. Murphy has hired a half-dozen execs, including in May Neil Kim, the former head of central engineering at Broadcom, who became Marvell’s CTO.

　　For its part, Cavium has seen revenue growth well above the industry average, but has yet to break into the black. Revenues rose from $235 million 2012 to $603 million last year when it lost $146 million.

　　In the first nine months of this year, Cavium’s revenues rose another 40 percent, in part thanks to its $1 billion acquisition of QLogic in 2016. However. Cavium has not trimmed loses at the same rate as its growth.

　　Murphy said he first met Cavium co-founder and CEO Syed Ali a decade ago. The two have been discussing the possibility of a merger since he joined Marvell, Murphy said in a conference call.

　　Together the two companies will have about 10 percent of their revenues in the fast-growing data center market and hold more than 10,000 patents. The deal will reduce the amount of revenues coming from hard-disk chips from 35 to 25 percent, Murphy said.

　　“I think we will still have higher R&D as a percentage of sales of any peer…and given we have almost no product overlap we expect no significant regulatory challenges,” Murphy said.

　　Murphy was clear the deal is an acquisition in which he remains in control as CEO but shares power with Ali and at least one other Cavium executive who will sit on the new company's board. "We won't be called Marvellium or Carvell," he quipped.