Marvell's Intel Deal Creates Few Fans

After weeks of rumors, Intel(INTC) has sold off the first significant chunk of its business as part of its plan to refocus the company.

But while the $600 million Intel reaped for its line of handheld communications and application processors didn't excite its own shareholders, it went over like rotten fish among investors of the firm on the other side of the table -- Marvell Technology(MRVL).

Shares of Marvell plunged 15%, or $7.76, to close at $44.14. Intel's stock slipped 23 cents, or 1.3%, to $18.05 amid Tuesday's broader market downturn.

The deal gives Marvell an entry into the cell-phone handset business, one of the hottest semiconductor markets in recent months. But the near-term dent it will put in Marvell's margins, along with the fact that the business is not best of breed, seemed to be foremost on investors' minds.

"This isn't the first time the company's made a significant acquisition," says Doug Whitman, of Whitman Capital, which has a position in Marvell. "[But] this is the first time they've done a dilutive acquisition that's going to be significant in the short term."

According to Marvell's management, the X-Scale application processor and the baseband processor businesses it acquired generate about $100 million a quarter combined. Under Intel's roof, both businesses had operating losses.

The acquisition will hurt Marvell's earnings by 10% in the fourth quarter of fiscal 2007, and roughly 5% throughout 2008. But Marvell has set an aggressive timetable to turn things around by the fourth quarter of 2008.

The acquisition will give Marvell a long-term gross margin of 50%, which Stifel Nicolaus analyst Cody Acree said is lower than the company's previous long-term guidance of 53% gross margins.

Marvell CEO Sehat Sutardja, however, sees the deal giving Marvell a unique chance to move into the cell-phone market with a running start.