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Marvell to Buy Cavium for Around $6 Billion

Marvell Technology, trying to put behind it an accounting scandal that reshaped its executive ranks and a slowing market for chips that control hard disk drives in personal computers and servers, said on Monday that it would pay about $6 billion to merge with Cavium.

Marvell primarily sells chips used inside hard disk drives from customers like Samsung and Western Digital. The company also makes networking switches for enterprises and wireless system-on-chips for routers. But it has been trying to diversify into markets like connected cars and massive data centers as sales of hard disk drives fall behind solid-state storage.

Cavium is a natural fit. The company, founded by current chief technology officer Raghib Hussein and chief executive Syed Ali in 2000, is in the business of selling computer chips, storage connectivity, and networking parts like bus adapters and switches to corporations and telecoms. The San Diego, California-based firm serves a separate part of the enterprise market than Marvell.

The deal gives Marvell the beginnings of a data center platform. Cavium is also trying to loosen Intel’s stranglehold on the market for computer processors used in servers. It has started selling chips based on the ARM architecture to companies like Cray and Microsoft. The firm acquired the Thunder X2 line last year from Broadcom, but it also plans to sell a homegrown line of chips called Thunder X.

“This is an exciting combination of two very complementary companies that together more than the sum of their parts,” said Matt Murphy, Marvell’s chief executive, in a statement. The new company will have a market capitalization of $16.5 billion and annual revenue of $3.4 billion if the deal closes according to plan in the second or third quarter next year.

The deal fits with the strategy of other chipmakers, which are looking to scale as development costs swell and semiconductor prices fall. The latest evidence of that came two weeks ago when Broadcom unexpectedly bid $105 billion for Qualcomm, which turned down the offer for being too low and unlikely to fly with antitrust regulators.

The buyout is Murphy’s first major feat as chief executive of Marvell, which is still trying to recover from an accounting scandal that raised questions about its harsh management style. Murphy has been in the top spot for the last year and a half. He took the job shortly after Marvell’s founders, chief executive Sehat Sutardja and president Weili Dai, stepped down after an accounting investigation.

Marvell’s auditors found that the company had placed such significant pressure on sales teams that they prematurely booked revenue to meet targets. The company also failed to question Sutardja’s claim that he owned several patents that had been created by Marvell’s engineering team. It all fell short of actual fraud but stained the chipmaker’s reputation.

The scandal was not so serious that regulators forced Marvell to restate its financial results. But there were other repercussions. In the immediate aftermath, the company hired a new chief operations officer, chief legal officer, and three board directors nominated by activist hedge fund Starboard Value, which had acquired 6.7% of Marvell’s stock during the audit.

The effects have lingered. Late last year, Marvell said that it would cut costs by excising 900 employees from its research and development division. In addition to hiring a new chief accounting officer and chief financial officer, Marvell also recently enlisted Gary Ignatin, who presided over 30 deals as vice president of corporate development at Broadcom.

Marvell’s latest deal sparks more change. Ali will sit on the company’s board, while Hussein and Cavium’s vice president of chip engineering Anil Jain will take leadership roles with Marvell, based in Bermuda but operating out of Santa Clara, California. Once the deal closes, Cavium’s shareholders should own around 25% of the combined company.

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