April 16, 2018 - 12:45pm EST by
2018 2019
Price: 22.00 EPS 1.37 1.75
Shares Out. (in M): 662 P/E 15 12
Market Cap (in $M): 14,409 P/FCF 18 15
Net Debt (in $M): 1,150 EBIT 1,173 1,417
TEV ($): 15,559 TEV/EBIT 13 11

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MRVL is buying CAVM, recommendation to buy CAVM for a 9% gross spread and / or MRVL outright. This is a transformative merger for MRVL which will broaden MRVL’s product portfolio. We expect a re-rating post deal closure in the near term to ~14.5x for the NewCo, suggesting a near term upside of ~10%, looking further out, as NewCo is able to achieve its 2020 targets, we see potential for 30-35% upside.

Marvell – MRVL (standalone)


  • MRVL designs and markets semiconductor solutions for storage, networking and communications equipment, and multimedia/consumer applications.


  • MRVL is a market leader and industry pioneer in storage controllers.  MRVL focuses on HDD and SSD controllers, these controllers are the processors of memory chips, i.e. in a SSD product it bridges the flash memory components to the SSD input/output interfaces and executes firmware-level software. See picture below. MRVL’s main segment is storage (52% of revenue, grew 8.3% y/y) where it is a market leader in HDD (38% of revenue, Hard Disk Drive) of revenue with 65% of market share (the only competitor is Broadcom’s LSI division) and has 35% market share in SSD (14% of revenue, Solid State Drive).


    • The overall storage segment grew 8.3% y/y as the legacy HDD product declines (-4.3% y/y) were more than offset by the high growth SSD product (+66% y/y) as the broader industry changes from HDD to SSD. Within SSD, MRVL competes against Silicon Motion, Broadcom (in custom SSD) and others.


    • MRVL estimates the total SSD controller market is growing at a 15% CAGR though 2020, with various subsets growing at different speeds, i.e. client retail at 18%, data center / enterprise at 13%.


    • MRVL has been working on new products circling around the transition points in data centers to growth it’s data center opportunity beyond  traditional SSD controllers.

    • MRVL’s other segments fall into Networking (25% revenue, growing 1.4% y/y), where the company provides for Ethernet Switches (built into a router, connects devices together by packet switching to receive, process, and forward data) and Embedded Communication Processors (communication processors).  In general this segment is low end, services the low‐to‐mid end Ethernet market with presence in small and medium businesses and in China and regarded to be one general behind in leading technology.


    • MRVL’s last segment is Connectivity (15% revenue, also known as mobile & wireless, growing 14% y/y). Within Connectivity, Marvell is focused on makes Wi-Fi / Bluetooth products that are integrated into products such as: mobile phones, gaming consoles, printers, video dongles, tablets, and cars. The company has been focused on high‐end connectivity applications such as gaming, the connected car (i.e. a secure automotive gigabit Ethernet switch to enable safe data transmission in connected cars), and campus‐type installations (airports, universities, and hospitals). The company’s partners in this field include Tesla, BMW, Fiat Chrysler Automobiles, Jaguar, Audi, Toyota, Volkswagen, Daimler, Volvo, and others.


·        Customer concentration - As a HDD / SSD controller marker, MRVL’s overall largest customers are: Western Digital (21% of sales), Toshiba (13%), Wintech (10%), and Seagate (9%).



  • CEO Matt Murphy took over in July 2016 (supported by Starboard) and executed a successful restructuring action in November 2016 The end result was a doubling of EBITDAM from 2016 (10.8%) to 2017 (21.4%) and ramp of GPM (55.8% to 60.7%), while growing revenue by 5% y/y. The previous management team was a husband wife duo who treated the company as a personal kingdom, overspending on R&D, employees with extravagant compensation. Greenlight first tried to remove the management team and failed, Starboard took an activist approach, with combined with the company missing a few SEC filing requirements, resulted in a management change.


  • Looking forward: consensus estimates point to continued 4% revenue growth which, with continued margin improvement (EBITDAM expected to expand from 21% in FY2018 to 31% in FY2019).


Cavium – CAVM (standalone)


  • CAVM is a fast growing fabless semiconductor that semiconductor processors for intelligent and secure networks. In other words, CAVM makes processors for servers especially the ARM based models, where it competes against Qualcomm and MACOM. ARM is a type of processor architecture.


    • An ARM server is an enterprise-class computer server that employs a large array of ARM processors rather than a complement of x86-class processors (Intel / AMD).


    • As of 2018, the majority of personal computers and laptops sold are based on the x86 architecture, while other categories—especially high-volume mobile categories such as smartphones or tablets—are dominated by ARM; at the high end, x86 continues to dominate compute-intensive workstation and cloud computing segments


  • Total sales grew at a 3 year CAGR of 27%, however this is a bit misleading as it includes an acquisition (QLogic) in August 2016.  CAVM’s Q3’17 fully includes the QLogic acquisition and grew 15%.


  • End markets:

    • Enterprise and Service provider (78% revenue, grew 16% y/y in Q4’17)

    • Data Center (22% revenue, grew 12% y/y in Q4’17)


  • Customer concentration:  Hewlett Packard Enterprise, Dell and Nokia accounted for 36.2% of net revenue in 2017.


  • CAVM’s is also levered to ARM based server processors.

    • Recent news is positive for the prospects for ARM servers

      • Deployment of Cavium ThunderX V2 (estimated to be ~10% of 2017 revenue at 1% market share: 5/16/17 Benchmark) into Microsoft’s Azure cloud deployment. Microsoft has confirmed that about half of Microsoft data center servers can eventually run ARM based servers

      • Google’s decision to join the ARM server ecosystem and to establish an industry baseline for ARM servers

      • Incremental investment from Softbank to kickstart the ARM server ecosystem



  • While recent results include a large acquisition, year end 2017 results showed the top line growing 15%. The company has had a very lumpy GPM, ending 2017 at 50.8% and ranging from 65% in 2015 to 47% in 2016. Recent data points and news are all positive, but CAVM does operate in a competitive space where new product launches and ARM adoption are very important.  





·        Merger consideration of $6.4 billion ($3.4bn cash, of which $1.75bn to be borrowed)

·        Implies a EV / NTM EBIDA of 15.2x (page 94 proxy)

·        Expected at least $150 to $175 million in combined annual run-rate cost synergies within 18 months post close


Transaction Consideration

·        $40 per share in cash; and

·        2.1757 Marvell common shares for each share of Cavium common stock



Capital Structure / Return Strategy

·        Net leverage at close to be 1.0x, gross at 1.5x, including $162.5MM in synergies, excl synergies net lvg to be 1.2x (1.8x gross) (combined capitalization at deal close).


·        Long-term target of gross debt-to-EBITDA ratio is in the 1 times to 1.5 times range.


·        Long-term policy to return 50%+ of free cash flow to shareholder through dividend / buyback.


·        Regarding the combined entity, management has set a long-term gross margin target of ~65% and operating margin of ~35%, which does not take into account revenue or COGS synergies.


o   CAVM is already estimated to hit 65% GM in 2018, before MRVL brings in its data-driven cost and supply chain optimization.



·        Expanded Data Center Presence


o   Several cases of where the suite of products can target the data center. For example,

§  Marvell's networking business (25% of sales) covers verticals such as enterprise switches. The Cavium acquisition will give Marvell access to markets for Ethernet adapters and data center switches.


§  Marvell’s SSD storage business (14%) is market share leader in merchant SSD controllers (i.e. sells into tier 1 SSD OEMs such as Micron, Seagate, Western Digital (SanDisk), Kingston, Toshiba, and Lite-On). MRVL has been working on expanding its footprint into cloud data storage beyond SSD controllers and into SSD proper by exploiting the transition points in hyperscale data centers.




·        MRVL’s Networking  business

o   Increase’s Marvell’s networking business, improving its position against Intel Corp (INTC), Qualcomm (QCOM), and Broadcom (AVGO).


·        Similar end markets, little product overlap

o   The two companies share similar end markets but have little overlap in product offerings and customers, resulting in a highly complementary product mix




·        TAM expand

o   Cavium is expected to expand Marvell's addressable market by $8B, creating an annual addressable opportunity worth $16B.





Today the NewCo trades at ~15.5x FY2018 (ended in January’18) EBITDA and ~13.0x FY2019 EBITDA. Every fwd EBITDA turn is $1.77/share on the new company in terms of valuation.


Pre-deal MRVL traded at ~10.0x on average and faster growing CAVM ranged from 12x to 19x (proxy page 92). If the NewCo re-rates to 14.5x (a discount from the deal done at EV / NTM EBIDA of 15.2x), the stock returns 10% as shown below.  This can be a first step to the NewCo’s rerating post deal closure. Furthermore, the company is unlevered, trades at a 5.0% forward levered free cash flow yield with potential to improve margins, making the case for a re-rating in the NewCo.  



Looking further out, if the NewCo makes its 2020 projections, it would imply it trades under 11x EBITDA, the NewCo generates a fair amount of Free Cash flow, and the 11x EBITDA multiple with two years of cash build would be closer to 10.0x, which is attractive.  A price of $28/$29 on 2020 #s, or high 13x/low 14x (pre-1 turn of cash build, or high 12s/ low 13s post) is attainable if the NewCo makes progress towards 2020 goals.