Reports surfaced on November 3 that Marvell Technology Group (MRVL 20.59, +0.30, +1.5%) could be interested in acquiring Cavium, Inc. (CAVM 81.54, +5.71, +7.5%). Today, that speculation has been turned into fact as Marvell announced a $6 billion deal to acquire its smaller rival.
The strategic impetus for the deal was the opportunity to grow Marvell's addressable market with a company that has complementary offerings that provide end-to-end solutions for customers in the cloud data center, enterprise and service provider markets.
Marvell's largest customer is Western Digital (WDC), which accounted for 21% of net revenues in fiscal 2017. Cisco Systems (CSCO) and Nokia Solutions and Networks (NOK) together accounted for 25.1% of Cavium's net revenue in fiscal 2016.
Both companies face competition from Broadcom (AVGO) and Qualcomm (QCOM). Other competitors in the mix include the likes of Intel (INTC), Adv. Micro Devices (AMD), NXP Semiconductors (NXPI), Applied Micro Circuits (AMCC), Mellanox Technologies (MLNX), Quantenna Communications (QTNA), and Silicon Motion Technology (SIMO).
The two companies combined will have approximately $3.4 billion in annual revenue and it is thought annual run-rate synergies will be at least $150 to $175 million within 18 months after closing. Marvell also anticipates the deal being significantly accretive to revenue growth, margins and non-GAAP EPS.
As an aside, Marvell said today that it expects its third quarter revenue to be between $610 million and $620 million and non-GAAP earnings to be between $0.32 and $0.34, which is above the midpoint of the guidance Marvell provided on August 24.
That encouraging guidance and the strategic merit of the bid to acquire Cavium have been received well by investors, evidenced by the fact that MRVL is trading higher even though the deal to acquire Cavium includes a stock component. Specifically, Marvell will buy Cavium for $80.00 per share, which includes $40.00 per share in cash and 2.1757 MRVL common shares for each Cavium share.
Although the offer is a modest premium to CAVM's closing price on Friday, it translates to a 17% premium over CAVM's unaffected stock price on November 3, which is when media speculation about a possible acquisition first surfaced.
The deal, if approved by regulators and shareholders, is expected to close in mid-calendar 2018.