Marvell and Galileo: Who's Buying Whom? - TheStreet

First of all, congradulations! Clambering over landslides on

Nasdaq

, shrugging at the doubts gnawing at American investor stomachs regarding tech stocks, rising above the deteriorating state of affairs in Israel, yet another Israeli high-tech firm is announcing a mega deal in the billions.

As things stand today, after the

Chromatis

-

Lucent

(LU)

deal sank from a gargantuan $4.5 billion to $2 billion after Lucent's shares crashed, the

Marvell

(MRVL) - Get Report

-

Galileo

(GALT) - Get Report

deal takes first place in the Israel's parade of takeovers. The deal values Galileo at a whopping $2.7 billion (although because it is a stock deal, its value fluctuates with the companies' share prices). Some more Israelis, led by Galileo CEO and founder Avigdor Willenz, have joined the growing community of seriously rich high-tech Israeli entrepreneurs.

Yet, a second look at the identities of the buyer and the seller in this deal arouses disquiet: One can¿t help feeling something is amiss. On the surface, all is well. Marvell trades at a $7 billion market cap. Galileo Technology trades at a humbler $1.3 billion. Furthermore, the deal reflects a 70% premium over Galileo's price that day.

Galileo

Marvell

Year of
establishment

1993

1995

Number of employees

300

350

Sales
Q2 2000
($m)

44.5

61.9

Net profit
Q2 2000
($m)

7.8

2.7

Market cap

1,309

6,988

But Marvell, which also designs, develops and markets integrated circuits for broadband communications-related markets, is a very young company. Practically a start-up, in fact. Founded a mere five years ago, it employs 350 workers, sells at a rate of $120 million a year and nets about $5 million a year. It only went public in June of this year.

The U.S. Premium

Galileo is Marvell's senior in years. Founded eight years ago, it has been braving the public markets for three years and is an industry veteran. Its annual sales reach $90 million. Its $15 million annual net is three times higher than Marvell's.

One can't help but ask why in the world isn't Galileo the one acquiring Marvell. At least, why don't the two equals merge?

The snag of course is market value. The Galileo-Marvell transaction underscores the disadvantage Israeli companies suffer compared with their counterparts in the U.S.

It appears that a company incorporated and operating in Silicon Valley, polished by the right advisers and investment banks, with extensively connected Americans for executives, is also priced accordingly. An Israeli company led by Israeli executives and maintaining a development center in Israel will inevitably be valued lower, completely irrespective of security crises of any kind. It's a fact of life. It's something Israeli companies are just going to have to deal with.

The writing was on the wall, in any case, as far as the Galileo-Marvell deal is concerned, because of the Israeli company's particular market niche. Galileo makes chips destined for computer communication, a sector that has lately undergone a wave of mergers and mutual acquisitions.

Not Good at the Essential Tedium

According to the companies' reports, the idea of the merger was conceived as a result of their common activities. The two have begun to build a joint sales and marketing scheme for their unified line of products.

Clearly, having strong development capacity and an excellent line of products is just as important as marketing, sales, maintenance and customer service. These essential but relatively tedious facets of business are not the forte of the average Israeli, for whom they are also more costly. Hence the pressure to merge for the Israeli side.

When Israeli companies raise their heads from the lab and take a look around, they see how mergers are creating financially powerful business groups, and understand that's the way they have little choice but to go. Then it is just a question of price, even if the buyer is

Microsoft

(MSFT) - Get Report

, Lucent or

Cisco

(CSCO) - Get Report

. The price of $2.7 billion apparently looked about right to Galileo.

Now Galileo stockholders becoming instant investors in Marvell will find their stock locked up for a while. They must be praying for a fate kinder than that befell the previous owners of Chromatis Networks, who were left helplessly watching their holdings in the buying company lose over half their value.

TheMarker is a leading source for technology and business news information in Israel. The site is a venture backed by the Israeli daily Haaretz and TheStreet.com. For more stories from TheMarker, go to http://www.themarker.com/eng/