TELECOMS: China’s Chip Appetite Grows With Marvell Pursuit

By newsdoug on August 11, 2015

China has developed a sudden appetite for global microchip makers, with the latest reports saying several Chinese suitors are pursuing a purchase of the telecoms chip business of US-based Marvell Technology (Nasdaq: MRVL). This kind of consolidation is sorely needed in the global microchip sector, especially in the telecoms area, where many smaller companies are having trouble competing with global titans Qualcomm (Nasdaq: QCOM) and Taiwan-based MediaTek (Taipei: 2454).

An interesting twist to this story has seen Chinese state-backed firms emerge as some of the main consolidators in this trend, reflecting Beijing’s desire to build up a local chip-making sector. Despite years of trying and billions of dollars in investment, China has yet to find success in building a homegrown chip giant that can challenge big global names like Qualcomm, Intel (Nasdaq: INTC) and Taiwan’s TSMC (Taipei: 2330).

So now the nation appears to be embarking on a government-supported campaign to try and buy the expertise it can’t develop on its own. Such a strategy seems admirable and will result in Chinese firms buying many companies like Marvell whose future prospects didn’t look too bright. But I have serious doubts about whether state-connected companies like Tsinghua Unigroup and Datang Telecom (Shanghai: 600198) are the right consolidators that are needed now, due to their inexperience and roots tied to state-run companies.

All that said, let’s look more closely at the latest headlines that say Marvell wants to either sell or form a joint venture for its telecoms chip business, which it values at around $1 billion. (English article; Chinese article) The 2 Chinese companies that have expressed interest in a deal are Leadcore, a chip-making unit of Datang Telecom, and Shanghai Pudong Science & Technology Investment, a company tied to the Shanghai government.

In a posting on its own English language website dated from June this year, Datang indicated that it was interested in buying Marvell. (company article) That posting indicated that Datang approached Marvell about a merger late last year, but that talks broke off after 4 months after the 2 sides failed to agree on a price. Showing just how far apart they were, Datang said it wanted to pay about $500-$600 million, while Marvell wanted $2 billion.

Reasonably Priced

Based on Marvell’s current market value of about $6 billion, it appears that Datang was interested in only buying the telecoms chip part of the company’s business and that Marvell has reconsidered its price after the previous impasse. The $1 billion price tag cited in the latest reports looks reasonable, as it would be about half of what Marvell was seeking last year and 50 percent more than what Datang was offering.

Marvell’s decision to lower its price is inevitably being prompted by stiff competition, reflected in its latest financial report that saw its revenue drop 16 percent in the first quarter of this year. If it reaches an agreement, Marvell would be just the latest chip company to sell part or all of itself to a Chinese buyer.

Tsinghua Unigroup has emerged as a leading Chinese buyer of such global chip makers, purchasing 2 China-based chip design houses and also forming alliances with Intel and Hewlett-Packard (NYSE: HPQ) over the past 2 years. The company is also currently weighing a bid for US memory chip giant Micron (Nasdaq: MU). Shanghai Pudong Science & Technology has also been an acquirer, purchasing chip design house Montage Technology last year for $621 million.

Unigroup’s interest in Micron has attracted attention due to potential political sensitivities, since Micron is the largest US-based memory chip maker and is worth more than $20 billion. A Marvell deal could also be slightly sensitive, though its smaller size and Marvell’s position as a relatively minor player would probably lessen chances of political opposition.

Instead, these 2 Chinese bidders should be more concerned about their own lack of expertise at running a major global chip maker like Marvell. That would be their biggest challenge and one they’re likely to struggle with, which could ultimately decrease their chances for successfully creating a large, new global powerhouse from the integration of these struggling smaller chip makers.