Activist Starboard's Next Target: Struggling Marvell Technology

Starboard Value is looking to agitate for changes at Marvell Technology Group (MRVL) , and Jeffrey Smith's hedge fund has a number of cards it can put on the table to extract value from the struggling chipmaker.

Starboard Value revealed Wednesday it has a 6.7% stake in Sunnyvale, Calif.-based Marvell Technology Group and disclosed its plan to engage in discussions with the semiconductor manufacturer about a wide range of issues, including board structure, operations and capitalization, among other issues.

The activist also said it has retained three industry experts -- Rick Hill, Oleg Khaykin and Jeff McCreary -- as advisers.

"To me, it's a classic Starboard campaign," said an industry source who asked for anonymity, adding that Marvell has long been trying to address performance and governance issues.

The source said Starboard could look to fix up Marvell and sell it, explaining that such a scenario makes sense and may be more realistic than slimming down the Hamilton, Bermuda-based semiconductor company, which has had its fair amount of woes of late.

The chipmaker disclosed in September it was conducting an investigation of accounting and internal control matters, then said the following month that its accounting firm, PricewaterhouseCoopers, resigned.

Also in September, Marvell said it would exit out of its mobile platform business, which generates about $122 million in revenue and approximately $13 million in gross profit. In addition, last year the company was involved in litigation with Carnegie-Mellon University over patents for hard-disk drive chips. The federal Circuit Court of Appeals ruled in favor of the higher education institution in August, but cut the award against Marvell. 

The chipmaker has been looking for a CFO since May.

Derek Bork, a partner at Thompson Hine who advises on activism situations, observed Marvell has "just about every problem that an activist could find at a company." Still, he underscored the fact that Starboard started accumulating its position after Marvell's problems were made public and that there may be opportunity in the company's distressed condition.

"My guess would be that they're going to go to the company with a proposal for a balance sheet restructuring that would probably include an equity investment," Bork added.

While Marvell has struggled on multiple fronts, it has upside potential, said Daniel Amir, managing director of equity research at Ladenburg Thalmann.

"All the issues -- audit investigation and various compliance issues -- have definitely been hovering over the story," Amir said. "We do think that if, at some point, that gets solved and if you just focus on the business, you get to $12 [per share] if you do a sum-of-the-parts analysis."

Marvell shares currently trade at $9.28, giving the company a $4.8 billion market capitalization.

Marvell could get a higher price if the business was sold in pieces, Amir explained, acknowledging that there is synergy among segments. "I think one of the challenges with selling the company is the high level of control from management," Amir said. "It's not typical of a company that size."

MKM Partners analyst Ian Ing agreed, explaining that Marvell has started to take steps in the right direction, particularly its decision to exit the mobile handset business. "That was the most broken part of the story," Ing said, adding that proposing a top-notch CFO could be among Starboard's first priorities.

Starboard could also look to push for improved margins through divesting divisions, said Stifel Nicolaus analyst Kevin Cassidy. "Marvell has a lot of different products that they can sell off in different pieces," Cassidy explained.

Starboard launched a campaign at chipmaker Integrated Silicon Solution (ISSI) by teaming with Oliver Press Partners in December 2014. Sources observed then that the activist could push eventually push for a sale.

Then, about four months later, ISSI agreed to a sale to a consortium of Chinese private equity firms known as Uphill. The transaction invited a rival bid from Cypress Semiconductor  (CY) that led to an intense, two-month bidding war between the PE consortium and Cypress. Starboard closely monitored the bidding war, voicing its opposition to a marriage between Uphill and ISSI.

ISSI ended up with Uphill for a final price that was nearly $120 million higher than Cypress' and Starboard didn't engage further.

Officials with Marvell declined to comment while those with Starboard did not return requests for comment Wednesday.

More from Mergers and Acquisitions

NYSE Trader on Sirius, Pandora and Monday's Stock Market Decline

NYSE Trader on Sirius, Pandora and Monday's Stock Market Decline

Goldman Names Dees Co-Head of Investment Banking

Goldman Names Dees Co-Head of Investment Banking

All-Male Boards Could Face New Pressure From Shareholder Adviser ISS

All-Male Boards Could Face New Pressure From Shareholder Adviser ISS

3 Reasons Apple or Alphabet Should Consider Buying Tesla

3 Reasons Apple or Alphabet Should Consider Buying Tesla

Kraft Heinz Has an 'Unsustainable Diet,' Says Morgan Stanley

Kraft Heinz Has an 'Unsustainable Diet,' Says Morgan Stanley