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Marvell's Cavium Acquisition Gets CFIUS Review Clearance

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Marvell Technology Group Ltd.’s MRVL previously announced acquisition of Cavium CAVM moved a step closer after the Committee on Foreign Investment in the United States (“CFIUS”) cleared the deal of any type of unresolved national security concerns.

Notably, CFIUS is a government committee in charge of reviewing economic transactions by foreign entities.

However, Marvell still awaits approval from China’s State Administration for Market Regulation to complete the transaction. The company is optimistic regarding obtaining the necessary regulatory approvals in time and closing the deal by mid-calendar 2018.

In November 2017, the two companies entered into an agreement wherein Marvell agreed to acquire Cavium in a cash-stock deal worth $6 billion. Per the agreement, Marvell will pay $40 per share and 2.1757 of its common shares for each Cavium’s share.

This means, post buyout, shareholders of Cavium will own 25% of the combined company’s share. Marvell intends to fund the buyout with available cash in hand and $1.75 billion in debt.

Accretive to Top & Bottom Lines

This deal is expected to accelerate Marvell’s revenues and margins. Upon successful completion of the deal, Marvell expects the total addressable revenues for the combined entity to cross $16 billion mark.

Apart from this, the company expects to realize at least $150-$175 million in cost synergies, within 18 months post the deal conclusion.

Further, the combined entity is anticipated to witness a compounded annual revenue growth rate of 6-8%. It is also expected to be accretive to its margins. Marvell anticipates combined company’s gross, operating and EBITDA margins to be nearly 65%, 35% and 40%, respectively.

Marvell Technology Group Ltd. Revenue (TTM)

Marvell Technology Group Ltd. Revenue (TTM) | Marvell Technology Group Ltd. Quote

A Smart Move

In the maturing chip industry it only makes sense for both the companies to combine and gain a competitive advantage. The combined entity will have the ability to offer an enhanced product portfolio to its customers.

Marvell is one of the leading providers of chips into the networking, storage and wireless connectivity segments. Cavium’s product portfolio caters to security, storage and networking segments. Even as both the companies cater to storage and networking markets, their focus lies in different categories helping this business deal serve a broad range of end markets.

Furthermore, Cavium’s strategy of breaking into Intel Corporation’s INTC potential hold on the server microprocessor market makes it the most feasible buyout for Marvell, per a Bloomberg report. According to the report, Intel holds more than 99% market share in this space.

In fact, Cavium got a major breakthrough in the server microprocessor market in 2017 when it announced that Microsoft’s MSFT Azure cloud platform will run on its ARM-based processors instead of Intel’s. Consequently, we believe the Cavium buyout will provide Marvell a direct access to this lucrative market.

Currently, Marvell and Cavium, both carry a Zacks Rank #3 (Hold).

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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