Marvell Technology Group Ltd, a chipmaker trying to recover from an accounting scandal and slowing market, announces to buy rival chipmaker Cavium Inc. for $6 billion.
The company announced on Monday that it will pay $40 in cash plus 2.1757 common shares for each Cavium share. The buyer plans to use $1.75 billion in debt financing to fund the transaction.
Marvell has obtained an $850 million bridge loan commitment from Goldman Sachs Group Inc. and a $900 million committed term loan from Bank of America Corp.
The California-based Cavium had its stock jump as high as 8.9 percent to $82.60 whereas Marvell stock rose 1.8 percent to $20.65, on Monday.
According to Kevin Cassidy, an analyst with Stifel Nicolaus & Co., the deal is quite expensive however it necessarily helps both the companies to compete with semiconductor industry giants like Intel, Broadcom and Qualcomm. He also said that cost savings could add 10% to the company’s combined annual profit.
Marvell mainly builds chips paired primarily with hard disk drives, a market that no longer progresses due to the arrival of new data storage technology. Whereas, Cavium creates networking processors based on technology from ARM Holdings.
“This is an exciting combination of two very complementary companies that together equal more than the sum of their parts,” stated Marvel CEO Matthew J. Murphy, who took the role after his predecessor was forced to resign over an accounting scandal last year.
Cavium’s co-founder and CEO Syed Ali, co-founder Raghib Hussain and engineering executive Anil Jain will be joining the Marvell leadership board. Shareholders of Cavium will own about 25 percent of the combined company on a pro forma basis. The combined company will be headed by Marvell’s CEO Murphy.
This is the biggest deal for Murphy after he took his seat as the chief executive officer last year. The company is trying to recover from a corporate scandal that stained its reputation. In 2015 the chipmaker launched an internal investigation into its accounting practices that concluded that the managing heads were placing pressure on sales and financial staff to meet revenue targets, who in return prematurely booked revenue. The company also failed to raise concerns about former CEO Sehat Sutardja’s claims of owning several patents.
During the probe, Starboard Value took a stake in Marvell and forced for management changes and divestments. Sutardja and his wife Weili Dai, who founded the company in 1995, resigned in April 2016. Starboard still holds a 6.8 percent stake in Marvell.
Marvell currently has a market cap of $10 billion while Cavium has about $5.2 billion. The deal – that is expected to close in mid-2018 – is an attempt to consolidate the $300 billion semiconductor industry. Earlier this month, Broadcom offered to buy Qualcomm for $103 billion, the biggest deal so far in technology deal-making.