Today’s news: Marvell Technology agrees to buy Cavium. Sell Cavium (CAVM).
The recently-rumored merger between semiconductor companies Marvell Technology Group (MRVL – yield 1.2%) and Cavium (CAVM) was announced this morning. Marvell will purchase Cavium in a deal valued at approximately $80 per CAVM share. CAVM shareholders who hold their stock until the deal culminates will receive $40 cash per CAVM share and 2.1757 MRVL shares per share of CAVM. The transaction is expected to close in mid-2018. The deal was unanimously approved by both companies’ Boards of Directors.
What Happens Next?
First off, I would immediately suggest ignoring MRVL shares. Rarely does the stock in the acquirer—i.e., the bigger company that’s purchasing the smaller company—have any significant price action until after the deal closes and the new company has reported one or two successful quarters. Only then does Wall Street tend to gain enough confidence in the new venture to begin buying the stock and recommending the stock in research reports. (I will oftentimes begin recommending such companies around that time, as I did after the Kraft-Heinz, Dollar Tree-Family Dollar and FedEx-TNT Express mergers.)
As for CAVM, the most likely occurrence will be that the stock trades near 80 per share until the M&A deal closes. That means your capital is likely to be stagnant for many months, and that’s why I’m recommending that you sell your CAVM shares this week. You’ve just achieved your approximate maximum capital gain. Let’s move on to another undervalued growth stock! (Also, if you needed money from your portfolio for upcoming expenses—tuition, real estate transactions, vacation—your CAVM shares are your most obvious source of cash right now.)
Could CAVM shares rise higher than 80? In the very short term, excited investors could buy the stock, pushing the price slightly above 80. For example, the stock is trading at 81 today. However, there’s no rational reason for the stock to trade higher than the buyout price.
Since CAVM shareholders will receive shares of MRVL, then any strong revenue or profit outperformance at Marvell in the coming months that boosts the value of MRVL shares will then boost the value of CAVM shares. At this point, MRVL is finishing a year of strong earnings growth (January year-end), and is expected to grow EPS just 10% next year. Slow earnings growth doesn’t typically deliver big upside quarterly earnings surprises, so I’m not expecting any particular growth catalyst in the MRVL share price.
Want to read more about how stocks react to M&A activity? Here’s my article on the topic: What to Do When Your Stock is a Takeover Target. Send questions and comments to crista@cabotwealth.com.
I’m happy that you’ve made money in CAVM, and that you get to tell your friends and relatives about the experience at Thanksgiving this week! Now sell your stock and don’t overthink it.