Tech

Tara Lachapelle is a Bloomberg Gadfly columnist covering deals. She previously wrote an M&A column for Bloomberg News.

Lately, activist shareholders haven't been living up to their name. Instead of storming in on a corporation's management and agitating for change, they're increasingly becoming more like stock pickers, or are stepping in only to endorse strategies that companies have already embraced. 

But now, along comes Jeff Smith's Starboard Value, serving up just what the market's been missing: A classic activist campaign at Marvell Technology.

The hedge fund reported a 6.7 percent stake in the floundering semiconductor company on Wednesday and said the stock, which has fallen more than 40 percent in the past year, is "undervalued," as activists do. The angle Starboard seems to be taking is margin improvement, which if you look at this chart, is clear Marvell needs:

Nothing to Marvel At
Marvell's profit margins are lagging behind the industry's.
Source: Bloomberg
Industry refers to publicly traded semiconductor companies valued at more than $1 billion

Once a fast-growing chipmaker, Marvell is now an utter mess. Demand has fallen for its storage and networking products. And if that weren't challenging enough, the $4.8 billion company in September disclosed an internal investigation into its accounting, which led to its auditor, PricewaterhouseCooopers, quitting.

Starboard is now the fourth-biggest shareholder, according to data compiled by Bloomberg. And it sounds like Marvell could benefit from some fresh blood. The second- and third-largest owners are Marvell's founder, chairman and CEO Sehat Sutardja, and his brother Pantas. Sutardja's wife, Weili Dai, is the company president and one of only five directors. The lead director since 2009 is Arturo Krueger, a former Motorola Semiconductor executive, who was 75 years old as of Marvell's latest proxy filing last May. 

Starboard has identified cost-cutting opportunities for Marvell, such as exiting its disappointing mobile-device business, according to the Wall Street Journal. Marvell hasn't reported last year's results yet, but for the fiscal year that ended in January 2015, mobile and wireless end-markets accounted for 29 percent of net revenue. Storage technologies brought in almost half of sales, and networking generated another 18 percent. 

Starboard has been building up a good activism track record, proving it knows how to identify the right opportunities. Little more than a year after Starboard replaced the entire board at Olive Garden's parent company, Darden Restaurants, and made Smith chairman, Darden is outperforming rival stocks. This was a company that had lost its way and was in desperate need of a turnaround. Starboard shook things up, and the changes seem to be working. 

Falling Short
Marvell shares have been falling amid declining demand for personal computer parts and an internal investigation into how it recognizes revenue.
Source: Bloomberg

Marvell, too, has lost its way. And analysts have been overly optimistic about its prospects during the past two years. 

News of Starboard's involvement Wednesday triggered a 6.9 percent jump in Marvell's stock price, its biggest gain since November 2013, which was when private-equity firm KKR was said to have purchased a big stake with the possibility of a leveraged buyout offer. An LBO never happened.

Since then, the semiconductor space has undergone record consolidation. About $100 billion of last year's $3.8 trillion of global M&A involved chipmakers. And even Marvell's largest customer, Western Digital, which accounts for 20 percent of its revenue, is in the middle of a massive acquisition. It agreed in October to buy SanDisk for $19 billion.

Analysts forecast Marvell's sales will continue declining for the foreseeable future and that net income (on a GAAP basis) will remain well below what the company earned in years past. With the stock near a three-year low, Starboard got in just in the nick of time. We'll see if it can help save Marvell the way it's done with Darden. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Tara Lachapelle in New York at tlachapelle@bloomberg.net

To contact the editor responsible for this story:
Beth Williams at bewilliams@bloomberg.net