Marvell Technology Group Ltd. MRVL has put all speculations to rest and confirmed today morning that it has entered into an agreement to acquire its smaller competitor Cavium Inc. CAVM. The transaction, which involves a mix of cash and stock, is valued at approximately $6 billion.
Per the agreement, Marvell will pay $40 per share and 2.1757 of its common shares for each Cavium share. This means, post buyout, shareholders of Cavium will own 25% of the combined companies share. Marvell intends to fund the acquisition with available cash in hand and $1.75 billion in debt.
Cavium shares were trading almost 6% higher in the pre-market trading. The company also has an impressive price performance history. In the past three months, Cavium shares have rallied 26% compared with the industry’s gain of 11.3%.
Currently, Marvell and Cavium carry a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Marvell Technology is one of the leading providers of chips for hard disk drives. Meanwhile, Cavium offers software compatible processors that enable functionality in data center applications and network connectivity for server and switches. Therefore, the buyout is believed to provide Marvell Technology an opportunity to expand its offerings and an access to newer market.
Furthermore, Cavium’s strategy of breaking into Intel Corporation’s INTC lucrative hold on the server microprocessor market makes it the most feasible buyout for Marvell Technology, per a Bloomberg report. According to the report, Intel holds over 99% market share in this space.
In fact, Cavium got a major breakthrough in the server microprocessor market early this year when it announced that Microsoft Azure cloud platform will run on its ARM-based processors instead of Intel’s. Therefore, we believe that Cavium buyout will give Marvell Technology a direct access to this lucrative market.
An Effort to Rebuild Itself
The latest deal is believed to be Marvell Technology’s one of the biggest step toward rebuilding itself after the massive accounting scandal in late 2015 that plagued the company’s financial results throughout fiscal 2016. In fact, the company has overcome its prior headwinds and refurbished its senior management as well.
However, the new management had been facing a sever challenge in the form of sluggish growth prospects in the hard disk drive market.
Under the leadership of Matthew J. Murphy (CEO), Marvell Technology seems to restructure its business to focus on growth segments like adding offerings in areas such as data centers and wireless communications, which are anticipated to boost revenues.
The Cavium buyout is projected to be in line with the company’s aforementioned initiatives. We expect the acquisition to help in lowering its dependency on hard disk drive market that is currently stagnant due to availability of other data storage solutions.
Marvell Technology has marginally outperformed the industry in the last three months. While the stock rallied 29.9%, the industry to which it belongs gained 28.7%.
Going forward, the deal depicts another move toward the consolidation of semiconductor industry. Earlier this month Broadcom Ltd. AVGO made a takeover bid of $103 billion for Qualcomm Inc. QCOM, which the latter rejected saying its too undervalued.
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Marvell Technology Group Ltd. (MRVL) : Free Stock Analysis Report
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