Updated from 3:52 p.m. EDT

Shares of

Marvell Technology Group

(MRVL) - Get Report

plunged Tuesday after the data storage and networking company said it would buy

Galileo Technology

(GALT) - Get Report

, a rival that focuses on digital communications technology, in a stock swap initially valued at $2.7 billion.

The deal's value fell to around $1.87 billion after a few hours of trading as Marvell shares finished down $24.69, or 305, at $57.06. Galileo Technology finished up 94 cents, or 3%, at $31.61.

Based on the stocks' closing prices Monday, Marvell's offer was worth around $55.10 a share to Galileo shareholders, whose stock closed at $39.77, marking a premium of around 41%.

Not many analysts cover the thinly traded stocks, but a few agreed to discuss the market's reaction to the deal on the condition that neither they nor their firms would be identified. One, whose firm has performed banking work for at least one of the merger partners, attributed the plunge to the overall sell-off of technology stocks Tuesday and the limited liquidity of Marvell's shares, which can sometimes exaggerate swings in a stock price.

Another analyst who covers the industry, does not directly rate either stock but is considering issuing a rating on the combined entity, said some investors perceive that Galileo has been trailing competitors in its local area network switching business and in wide area network switching.

Slowing industry growth could also raise concerns about Marvell's internal growth rates, this analyst said.

Marvell is attempting to focus on data switching and routing systems, a shift in strategy from its initial bent toward data storage systems. Galileo's strength is in telecommunications technology.

Some investors may have perceived that, in seeking an acquisition, Marvell's choices were somewhat limited. Rivals including

Applied Micro Circuits

(AMCC)

and

PMC-Sierra

TheStreet Recommends

(PMCS)

have been buying start-ups, both publicly traded and closely held, at a high rate.

Karl Motey, analyst for

C.E. Unterberg Towbin

, dismissed that theory, noting that those companies focus on wide area networking while Marvell and Galileo seem more interested in local area networking. (Motey rates Applied Micro's and PMC-Sierra's shares strong buy and does not cover the other companies mentioned. His firm has not done underwriting for any of the companies.)

"The addition of Galileo simply launches them into the local area networking semiconductor market," Motey said.

But even under his interpretation of the merger's intent, investors have reason to be wary. "

Broadcom

was steamrolling the LAN semiconductor market. How is the combination of Marvell and Galileo going to take on Broadcom?"

Under that view, the merger partners' day in the market seemed slightly better. Broadcom's shares were trading down $10.31, or 4.64%, to $212.06 Tuesday afternoon.

Also on Tuesday, Galileo said its net income for the third quarter fell 5% to $6.7 million, or 15 cents a diluted share, compared with $7.1 million, or 16 cents a diluted share, in the third quarter of last year. The results in the latest quarter exceeded by a penny the expectations of analysts polled by

First Call/Thomson Financial

. Revenues were $28.8 million compared with $22 million in the year-earlier quarter.

Under the terms of the deal, Marvell will issue 0.674 of its common shares for each Galileo share in a tax-free, stock-for-stock exchange. Galileo shareholders and option holders would receive approximately 32.9 million shares of Marvell stock, or 25% of the diluted ownership in the combined company in exchange for all the shares and options of Galileo.

The transaction is subject to the approval of shareholders of both companies and of U.S.and Israeli regulatory agencies. The companies expect to close the deal in the first calendar quarter of next year.

George Hervey, chief financial officer of Marvell, told analysts in a conference call that the deal would increase its 2001 earnings per share by about 51%, the

Reuters

news service reported.