Why Shares of Cavium Networks Popped Today

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What happened

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Shares of Cavium Networks (NASDAQ: CAVM) rose on Monday after the company agreed to be acquired by Marvell Technology (NASDAQ: MRVL). This comes after reports of talks between the two companies in early November. At 3:30 p.m. EST, Cavium stock was up about 10%, while shares of Marvell were up about 5%.

So what

Marvell has agreed to pay $40 in cash and 2.1757 Marvell shares for each outstanding share of Cavium, based on a purchase price of $80 per share. The transaction is valued at roughly $6 billion, and Cavium shareholders will own about 25% of the combined company after the deal closes.

The combined company will produce $3.4 billion of annual revenue. Marvell's HDD (hard disk drive) and SSD (solid-state drive) controllers, networking solutions, and wireless connectivity products will be complemented by Cavium's multicore processors, storage connectivity products, and security solutions. Marvell expects its total addressable market to expand to roughly $16 billion following the transaction.

Cavium co-founder and CEO Syed Ali commented on the deal: "Individually, our businesses are exceptionally strong, but together, we will be one of the few companies in the world capable of delivering such a comprehensive set of end-to-end solutions to our combined customer base. Our potential is huge."

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Now what

Once the transaction closes, Marvell expects to realize between $150 million and $175 million of annual run-rate synergies within 18 months. The deal is also expected to be significantly accretive to revenue growth, margins, and non-GAAP earnings per share.

The deal is set to close in mid-2018, pending regulatory approvals. Marvell will report its third-quarter results on Nov. 28, and investors should expect to hear more about the company's plans at that time.

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Timothy Green has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.