SiRF and Marvell a good match?

Wednesday, April 23, 2008

In my last post on SiRF, I mentioned that SiRF will likely merge or get acquired. For those of you missed it, you can read it here. I finished with a teaser suggesting a merger with Marvell as one of the options. Let us look at why this is possible. Before you read on, I should warn you that this is just a speculation. So take it with a pinch of salt and more of a synergy analysis.

To reassert my point on SiRF, the company might have stayed a little too long as a GPS company without acquiring other connectivity solutions or pairing up with a complementary solution provider. With mobile driving GPS growth, SiRF may find itself marginalized in this space despite its leadership. You can find earlier coverage on this topic here, here and here.

Marvell, on the other hand, lacks GPS capabilities. Sehat Sutardja, Marvell’s CEO, suggested that GPS has to be commoditized to have only an incremental cost impact on the mobile phone silicon. All said and done, if it cannot have a competitive GPS solution in the next couple of years, it will lose its baseband communications processor customers. The integration of application and communication processors also implies potential share loss in the application processor market. You can read more on Marvell’s connectivity solutions capability in my valuation series here and here.

If SiRF merges with Marvell, the latter will have a complete portfolio of connectivity solutions complementing its WLAN, Bluetooth and FM capabilities. It will also get DVB-H for mobile broadcasting. This will allow the Santa Clara-based Marvell to develop its own mobile platform if it finds relevant demand. I agree that Marvell already has enough financial headaches and operating expense issues to take care of. These will certainly be deterrents against any new merger. But we should note that SiRF is a fairly nimble company. So, Marvell should get favorable margins from the fabless SiRF.

The combined entity can definitely benefit from synergies. Both companies have RIMM as its customer. But in the future, this position will be challenged given aggressive pricing and bundling from the leading vendors. Broadcom, both companies’ main competition, has the potential to displace both of them from these accounts. A merger can help ward this situation off. Marvell’s efficiency can help lower the costs of GPS as it envisions. Besides, SiRF’s strong IP position in GPS will give the company good leverage during licensing discussions.

Finally, while I don’t want to read too much into it, I cannot ignore the Banatao connection. Diosdado Banatao, is now the chairman and interim CEO of SiRF. Given his reputation as a successful serial entrepreneur, his appointment as the interim head itself seems to point to an M&A. it also makes the Marvell angle more likely. He was intimately involved with Marvell as an early stage investor and as a board director until 2003. He knows the Sutardjas very well. He knows Marvell’s work culture, strengths and product portfolio and should have a better sense of the synergies between these companies than anyone else out there. So we can trust him to at least give this idea a good thought.

In summary, it is possible that SiRF and Marvell may merge. It may not be a bad strategy for either company. I will leave the price of such a deal to a SiRF valuation analysis that I am planning to do soon.

(For the interested reader, I have done an extensive valuation analysis of Marvell which will complete this weekend. You can read the first few articles of this series here, here and here)

[Long SiRF at the time of writing]

Posted by Vijay Nagarajan at 7:00 PM  

3 comments:

I've been reading your posts about SIRF and I like the fact that you're analyzing them from their competitive standpoint because that's the main issue right now. I agree with your reasoning for SIRF to be acquired by Marvell or other bigger player in the wireless industry but I feel SIRF also stands a good chance at making significant headway into the wireless market by itself. The wireless industry is at a crossroad at the moment. You have the emergence of convergent devices, the transition to 3G network, and new players (i.e. google, intel, apple) coming aboard. At a time like this, it's perfect opportunity for little players like SIRF to come in and disrupt the market. GPS will enable a whole new class of killer applications on wireless devices and in this sense, I believe SIRF will continue to have competitive advantage over traditional semiconductor powerhouse like Broadcom or Texas Instrument because they have the expertise to develop end-to-end solutions and their collaboration with Intel is a testament to that ability.

[Disclosure: I'm long SIRF]

nachos said...
April 24, 2008 at 10:38 AM  

I've been reading your posts about SIRF and I like the fact that you're analyzing them from their competitive standpoint because that's the main issue right now. I agree with your reasoning for SIRF to be acquired by Marvell or other bigger player in the wireless industry but I feel SIRF also stands a good chance at making significant headway into the wireless market by itself. The wireless industry is at a crossroad at the moment. You have the emergence of convergent devices, the transition to 3G network, and new players (i.e. google, intel, apple) coming aboard. At a time like this, it's perfect opportunity for little players like SIRF to come in and disrupt the market. GPS will enable a whole new class of killer applications on wireless devices and in this sense, I believe SIRF will continue to have competitive advantage over traditional semiconductor powerhouse like Broadcom or Texas Instrument because they have the expertise to develop end-to-end solutions and their collaboration with Intel is a testament to that ability.

[Disclosure: I'm long SIRF]

nachos said...
April 24, 2008 at 10:38 AM  

Nachos,

Thanks for your comments.

If you look at it from just a devices standpoint, as I have mentioned, SiRF cannot be part of about 3/4th of the mobile phones in the future because the leading chipset vendors now have GPS capabilities. The laptop and laptop evolution market is a slightly different ballgame. SiRF's partnership with Intel will certainly help. But I think more importantly, since LBS is very service-based, the value will perhaps be driven by the service platform provider. I can think of numerous creative applications that go beyond the chip. So, while I agree that these killer applications will drive the GPS future, the semiconductor solution will have less of an impact than the software and the platform itself. The silicon will likely be commodatized (Incidentally Marvell's view of GPS). SiRF itself does not seem to be looking beyond being the silicon provider, at least not for now. Banatao, in the earnings call today, mentioned that they were primarily in the semiconductor space. Besides, I have high respect for the engineering capabilities of Qualcomm and also for Broadcom's aggression. These two have the resources and the customer-base that can potentially outrun SiRF.

Vijay

Vijay Nagarajan said...
April 25, 2008 at 12:31 AM  

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