Marvell and Terayon: Scandal-Sale Exit Strategy

Amid the wave of options backdating scandals, or mere irregularities in financial statements that have surfaced this year, companies have now found themselves a new exit track: the “scandal-sale.” That was the fate of Mercury Interactive Corp. (MERQ), which will be swallowed up by Hewlett Packard (HPQ) within a few days, and M-Systems Flash Disk Pioneers (FLSH), which will become a branch of SanDisk Corporation (SNDK) within a month. (Personally, I attribute the M-Systems sale more to the impending year-on-year shortage of flash chips than to the options affair.)

Last Friday, Marvell Technology Group (MRVL) became the latest giant to join the list of top line names rumored to be on the way to a similar exit. While all the tech stocks around it were taking a nosedive, Marvell suddenly climbed more than 4% on double its average volume.

Another two companies I feel could go under the hammer are Terayon Communication Systems Inc. (TERN), which soared 25% on an exceptional volume of 1 million shares, and Taro Pharmaceutical Industries (TARO), which yesterday published the findings of the independent law firm (Jenner & Block LLP) commissioned by its audit committee. These will almost certainly give its shareholder, Franklin Resources Inc. (BEN), even more reason to push forward with its management shake-up.

According to several sources quoted last Friday, Marvell is being courted by a number of private funds interested in a leveraged buyout [LBO], and by its rival Texas Instruments Inc. (TXN), which is interested in a takeover. The reason is simple: When a company -- one that is considered a very good one in addition to being active in the hottest electronics and communications chip markets -- plunges from a market cap of more than $20 billion at the beginning of the year to less than $10 billion after a series of profit warnings and an options scandal, both multibillion dollar private funds and major competitors swoop in to make a killing. No one knows if there’s anything to these rumors, but it would not be difficult to guess why an LBO could happen and why it might not.

LBO is the term used to describe a leveraging deal whereby the company owners, together with private funds, make shareholders a cash offer for their stock, higher than the market price, following which they take the company private. They use the company's assets, among other things, as security against massive loans to finance the deal.

In Marvell’s case an LBO would make sense, since, in contrast to most technological companies on the market, its controlling shareholders, the Sutardja family, own 20%. This means that only 80% of the total shares issued will be available for purchase from the public. In recent years, the family sold approximately 10% of their holdings through the market, so it is not short of cash resources with which to participate in an LBO group, if it so wished. Those people who don’t believe in the feasibility of such a deal claim simply that it is extremely expensive, at least $13 billion, and that it is in the danger zone where profit and sales multiples are high.

Those who do believe the deal can work say the family would like to stop featuring in the headlines as a public company under the cloud of an inquiry by the US Securities and Exchange Commission [SEC] and class action suits. They would prefer instead to focus, as a private company, on the integration of the DSPC division that Marvell acquired from Intel Corporation (INTC), and also work on the secure launch of many more projects now in the pipeline. As is usually the case with such deals, the plan is to reappear on the market in two or three years as a healthier company, free of investigations, with the newly integrated DSPC division having become profitable, as promised by Marvell's CEO.

As mentioned, Texas Instruments is also in the frame as an interested bidder for Marvell, and this makes a lot of sense. Marvell has a presence in many rapidly growing fields, some of which are outside TI’s cellular sector. Others are in cellular fields but not those in which TI operates. On the other hand, there is no logic to TI taking over the DSPC division through the acquisition of Marvell, since it competes directly in the cellular telephone chipset business. Furthermore, in all the interviews with Marvell’s founders that I have read over the years, the impression I got was that being part of a big company was the last thing they wanted. They see themselves growing to a size similar to that of TI on their own.

Terayon is another company on the ‘Scandal-Sale’ exit route, at least to judge by the rumors and the trading on the market. Since plummeting to a low of $0.74 at the end of July and subsequent delisting from Nasdaq and transfer to the Pink Sheets, Terayon has doubled its price, ending last Friday’s session at $1.50. The doubling was seen in large volumes, even though the company has yet to indicate when it will publish its restated results for previous years, without which it cannot reapply for listing on Nasdaq’s regular market.

Who could possibly be interested in Terayon after its collapse from a company with a multibillion market cap to one worth less than $100 million? Video is the key word here. At a time when the entire world is talking about video broadcasting over the Internet and on cellular handsets, someone apparently took note of Terayon’s video technology, which is sold primarily to cable television companies.

As cable, fixed line telephony and cellular companies battle for the supply of video to private consumers, there are those who apparently want to get a toehold in the hot field of Internet protocol television [IPTV] equipment. They appear to have taken an interest in Terayon’s flagship product, “CherryPicker,” and some say it still has key technological advantages in video signal compression. It is believed that once it has put the restatement of past results behind it, Terayon will be up for sale to the highest bidder.

MRVL 1-year chart:

TERN 1-year chart:

Published originally by Globes [online], Israel business news - www.globes.co.il
© Copyright of Globes Publisher Itonut (1983) Ltd. 2006. Republished on Seeking Alpha with full permission.

Comments

[Jack Haddad:]

Dear Mr. Cohen,

I thank you much for your input on the article stated above...

While the back-dating scandal of options could have generated red flags in the minds of many investors, I'm not so sure why purchasing Intel's Communications business (a losing interprise for intel) would be regarded and deemed as an automatic failure to Marvell Technology Group!? The stock has shed nearly 22 points on the 600 million Intel purchase agreement alone.

All in all, the more negative the sentiment grows on Marvell, the more share I will accumulate. The selling has been severely overdone.

Jack Haddad, MD, MBA, CMT, DITA
UCSF Medical Center, San Francisco, CA
San Jose orthopedic Group, San Jose, CA
Merrill Lynch, Santa Clara, CA
Haddad Capital Management, LLP., San Jose, CA

2006 Nov 18 03:55 PM