Update: Intel sells comms unit to Marvell for $600 million

Intel continues effort to shore up its core business in the face of increasing competition from AMD

Intel will sell its communications and application processor business to Marvell Technology Group for $600 million, the companies announced Tuesday.

The move is part of an Intel effort to shore up its core business in the face of increasing competitive pressure from Advanced Micro Devices and a slowing global PC market. Intel Tuesday identified mobile computing, in addition to the traditional PC market, as an area that it will focus on.

In April, Intel announced that it expected a 3 percent drop in revenue for 2006, and said it would undertake a reorganization that could include layoffs within 90 days. A layoff announcement is widely expected around the time Intel makes its next earnings announcement, on July 19.

Intel expects profits to decline from $12.1 billion last year to $9.3 billion this year. Speaking to Wall Street analysts in New York in April, Chief Executive Officer Paul Otellini said the company will cut spending this year by $1 billion, cut capital expenditures by $300 million and begin a 90-day structural reorganization of "nonperforming business units."

Getting rid of the communications business appears to fit nicely into that plan. "Communications is a long and mostly sad story at Intel," said Gordon Haff, an analyst with Illuminata. "It's a product line where they just pumped untold dollars into a black hole for years now."

He said that while Intel has had a few "moderately successful" products come out of the group, it never developed into a particularly profitable business.

"This sale is specifically of our handheld business, making cellular and application processors. We’re still very much focused on wireless communications technologies like Wi-Fi and WiMax," said Intel spokesman Robert Manetta.

Those technologies are currently slated for notebook PCs, but Intel could potentially find itself back in the handheld business, if they are adopted for future generations of handhelds or cell phones.

The business segment Intel sold to Marvell includes cellular communications processors, which handle voice data in electronics such as BlackBerry devices, and applications processors, which are the CPUs (central processing units) that give brains to smartphones like the Motorola Q and Palm Treo.

Manetta declined to say whether Intel had ever turned a profit by making these chips, stating simply that the company decided that the handheld area "was not a good fit for us."

Indeed, analysts say Intel entered that market segment too late to be profitable.

"It's an area that made sense at one point for Intel to make an investment there and to attempt to establish a presence in the wireless space, but frankly that market was pretty mature by the time Intel got involved in it. It's a market that tends to focus on high volume, very thin profit margins, with really bloodthirsty competition in it. So it's a tough place to make a dollar," said Charles King, an analyst with market research firm Pund-IT Inc.

On Marvell's part, the buy will give it a leg up in the market for handheld computing devices such as PDAs (personal digital assistants) and smartphones. The deal is expected to close in the fourth quarter. Marvel will also assume some of the unit's liabilities.

The Intel unit produces processors built on the company's XScale technology, and include the PXA9 processor used in Research in Motion Ltd.’s BlackBerry. The unit employs about 1,400 people, most of whom are expect to work for Marvell after the purchase is complete, according to the companies.

The acquisition marks Marvell's entrance into the cell phone market, said Sehat Sutardja, chairman, president and chief executive officer of Marvell, speaking during a conference call to discuss the acquisition. "The cell phone business, even though it's a big business opportunity it's a very challenging market to enter," he said. Marvell acquired the technology from Intel rather then invest time and development effort to build it internally, he said.

With the acquisition, Marvell will focus solely on 3G (third-generation) mobile technologies and beyond, he said. The company is based in Santa Clara, California.

(Additional reporting by Ben Ames in Boston and Shelley Solheim in New York.)

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