Buy Marvell? The Rumored Deal With Cavium Has Real Potential

Shares of Cavium Inc CAVM were trading higher by more than 13 percent early Monday in reaction to the Wall Street Journal's report last week that the company is in talks to combine its business with Marvell Technology Group Ltd. MRVL.

As part of a potential merger, Cavium's investors should receive a "modest premium" and a deal may be announced within weeks, KeyBanc Capital Markets' Michael McConnell said in a Sunday note. Marvell is likely to present an all-cash offer of $82 per share to Cavium's shareholders, McConnell said — which implies a 20 percent premium to Friday's closing price. (See McConnell's track record here.) 

On Marvell's end, it would oversee a transaction that would be: 1) gross margin accretive, 2) accretive to earnings per share, 3) reduce its exposure to the HDD storage market, 4) increase its networking exposure and 5) result in a multiple expansion to the stock, the analyst said. 

Marvell's exposure to the HDD storage stands at 39 percent, but if its business is combined with Cavium the exposure would fall to 27 percent, the analyst said. Marvell's exposure to the networking market, at 26 percent, would nearly double to 49 percent under a combined business, according to KeyBanc. 

Cavium's operating expenses as a percentage of total revenue would likely benefit from a deal and move from 39 percent to Marvell's target range of around 30 percent, McConnell said. 

KeyBanc has an Overweight and $25 price target for Marvell Technology and an Overweight and $80 price target for Cavium. 

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