Will Marvell Go Private?

Marvell Technology Group (NASDAQ: MRVL  ) soared to the tune of over 10% in today's trading session on a report that private equity firm Kohlberg Kravis Roberts & Company (NYSE: KKR  ) has acquired a 5% stake in the company. Given that Marvell has a significant portion of its market capitalization in cash, and given that the business appears to have bottomed, it makes perfect sense that private equity would be interested in owning at least a part of the name. That being said, it wouldn't be surprising if Marvell were seriously considering going private at this time.

Marvell's business has bottomed
During 2012, Marvell had a particularly rough string of quarters. A good chunk of the company's revenue base is tied to hard disk drive controllers, so when the PC market started to take a turn for the worse, so did Marvell's storage division revenues. The company managed to gain non-trivial amounts of market share over the last year or so, and the massive decline in the PC market is largely over and done with (the decline appears to have decelerated), which means that Marvell's storage business has stabilized. Marvell also participates in the flash controller market, and finds its products in many solid state drives.

On top of this, however, is an excellent story in the networking chip space (which has been on a veritable tear). Not only is the underlying market proving to be particularly robust, as the rollout of wireless infrastructure worldwide continues, but Marvell claims to be gaining share here against rivals such as Broadcom (NASDAQ: BRCM  ) and LSI (NASDAQ: LSI  ) . Who doesn't like participation in a secular growth market with a share gain story on top?

Finally, there's mobile and wireless. The company's integrated apps processor and 3G/TD-SCDMA modem products are selling extremely well (albeit these are lower margin parts), and it looks like the company's connectivity combo chip products are doing particularly well as far as share goes, particularly in the lower cost, highly integrated markets.

Marvell is running a good, solid business that appears to have bottomed – but that's not the only reason private equity would be interested in snapping up Marvell.

Marvell has a lot of cash, but lawsuit continues to loom
Marvell has a cool $1.73 billion in cash on the books. While the company has already used quite a lot of cash for buybacks, and while going private when the shares were in the $6-8 range would have been even easier with this amount of cash on hand, Marvell is still very cash rich. Further, the company generated $316 million in free cash flow over the last 12 months. With the business likely to grow its free cash flow generation over the coming quarters and years, shares aren't particularly expensive even here, and the business could very easily pay for itself over the next 10 years.

Unfortunately, much of Marvell's cash is held hostage by the $1.17 billion payment it needs to make to Carnegie Mellon University since it was deemed that the company infringed on a number of key patents in its hard disk controllers. While this certainly seems excessive, Marvell isn't above the law, and if it can't successfully appeal this decision to a higher court, then that would make a leveraged buyout much more difficult. That being said, KKR seems to have a lot of faith that Marvell can either win this or that the shares are cheap even if $1.17 billion gets wiped from the balance sheet. In either case, it's an encouraging vote of confidence.

Foolish bottom line
Marvell is a good company that sells great products in its operating segments. While competition is fierce, and while 2012 wasn't great thanks to the PC market decline, there's still a lot of value here and if the company goes private, it wouldn't be surprising to see the company pull it off for at least $15/share. This would burn some of the folks who got in at the 2011 peak of about $22, but would be a nice return for anybody who bought the shares this year. That being said, it'll be interesting to see how this all plays out.

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