Intel Sells Handheld Chip Unit to Marvell

The Associated Press
Tuesday, June 27, 2006; 6:55 PM

SAN FRANCISCO -- Intel Corp. said Tuesday it will sell its division that makes processors for handheld gadgets to Marvell Technology Group Ltd. for $600 million in cash, as the world's biggest semiconductor maker focuses on its main business of supplying chips for PCs and computer servers.

Intel started making chips for cell phones and other handhelds in the late 1990s as part of a bid to expand into the growing field of communications, networking and storage devices. At the time, it said the moves would help it boost revenue as the PC market matured.

But Intel was never able to overtake entrenched competitors such as Texas Instruments Inc. and Qualcomm Inc., whose long-standing relationships with cell-phone makers in many ways resembled Intel's dominance among PC makers.

Although Intel doesn't break out the performance of the division, analysts said it remained unprofitable as Intel overestimated its ability to break into a business that was outside its core competence.

"Intel has banged their head against this wall for ... years," said Linley Gwennap, an analyst with the Linley Group, a research firm. "At this point, they're finally saying: 'Hey, my head hurts.'"

Marvell shares fell $7.76, or 15 percent, to close at $44.14 in Tuesday trading on the Nasdaq Stock market. Intel lost 23 cents, or 1.3 percent, to $18.05.

Complicating matters for Intel, Advanced Micro Devices Inc., which for most of its history copied Intel's innovations, in 2003 introduced a series of processors for PCs and servers that have stolen sales from its larger Santa Clara-based competitor.

Over the past three years, AMD, located in nearby Sunnyvale, has gained 4.5 points of market share, almost entirely at the expense of Intel, according to Mercury Research.

In April, Intel reported a 38 percent decline in first-quarter profit as lost sales and its flagging business units caused gross margins, the percentage of sales left after manufacturing costs, to fall below its own forecasts. That month, Chief Executive Paul Otellini said he'd respond by cutting Intel costs by $1 billion per year, vowing "no stone will remain unturned or unlooked at."

Terry Daniels, an analyst with Edward Jones, said Tuesday's deal is part of a plan for Intel to redesign its microprocessors and related products every two years, instead of every five years as it has been doing.

"It allows them to focus more on their core and get out of a business they weren't really that successful at," he said.

Santa Clara-based Marvell said it expects to retain the "vast majority" of the 1,400 people who work in the Intel division. Most of those employees are located in the U.S., Israel, China and Canada. Those workers who don't go to Marvell will be allowed to enter a redeployment pool in which they will be able to look for other jobs inside or outside of Intel, spokesman Robert Manetta said.

Marvell said it may take a charge for research and development costs when the deal closes. The 2,200-employee company sells chips for data storage, communications and networking products and had sales of $1.67 billion for its fiscal 2006, up 36 percent from the previous year.

The deal gives Intel the option of receiving $100 million of the purchase price in Marvell stock.

Intel entered the handheld market with the advent its XScale product line, which it developed using technology acquired in the 1998 settlement of a patent infringement dispute with Digital Equipment Corp. Marvell is also acquiring so-called baseband chips, which convert digital signals in cell phones into sound.

Under Tuesday's agreement, Intel will continue making those chips for up to two years as Marvell shifts manufacturing to partners.

XScale chips are used in a variety of products, including storage devices and networking equipment. But the sale to Marvell includes communications and applications processors for handheld devices only.

George Hervey, Marvell's chief financial officer, said the business generates about $100 million per quarter. Eric Ross, an analyst with ThinkEquity Partners, put the figure lower, estimating it generates sales of $300 million per year, less than 1 percent of the $38.8 billion Intel had in revenue last year.

Marvell Chief Executive Sehat Sutardja said he expected the business to improve as sales volumes grow and manufacturing shifts to fabrication partners who use more advanced processes.

Tuesday's sale is likely the first of a series of restructuring announcements by Intel, analysts said. Ross, the ThinkEquity analyst, said he expected additional cost-cutting moves, including the reduction of as many as 10,000 of Intel's roughly 100,000 jobs and the sale of the group that makes NOR flash chips used to store information in cell phones.


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