Marvell Technology Can Soar if Problems Are Resolved

"We were engineers, very focused, very optimistic about coming out with the best product, so we never thought for a minute about the challenges in the market," says Chief Executive Sutardja. "The thought never crossed our minds."

As it turned out, Marvell's disk-drive chips leapfrogged rivals', and the Santa Clara, Calif.-based outfit grew past annual revenues of $1 billion in just seven years. The company added chips for networking, imaging and wireless. By early 2006, the stock market valued Marvell at better than $20 billion, and its founding family members were multibillionaires.

Then the fast-moving chip maker stumbled, in classic Silicon Valley fashion. Acquisitions weighed on profit margins. The company falsely backdated stock-option awards. After an internal investigation concluded that Sutardja's wife, Weili Dai, had participated in the backdating, she stepped aside from her key executive posts. In the last two years, Marvell shares have fallen by two-thirds, to a recent $11.

But Marvell's prospects remain pretty darn good. It is addressing its management problems: The company is working hard to fill a vacant chief-financial-officer slot, and it hopes that a deal with regulators will allow Dai to resume her executive role.

Expenses have leveled off, so profits should grow as Marvell chips ride successful products like disk drives from Western Digital (WDC), and the BlackBerry handset from Research in Motion (RIMM).

Meanwhile, Marvell has chips for large new markets like DVD players and LCD televisions. In a couple of years' time, these developments could cause Marvell's earnings — and its shares — to double.

Sutardja launched Marvell in 1995 with Dai and his younger brother, Pantas, backed by silicon entrepreneur Dado Banatao (famous for helping start firms like SiRF (SIRF) and S3). They knew they were getting into the semiconductor business late in the game, says Sutardja, "so we were focused on developing technology that was three or four years ahead of the competition."

Fortunately, Sutardja was a gifted designer of processors, as well as "mixed-signal" chips, which combine analog and digital circuitry to handle wavy analog signals as well as the zeros and ones of digital logic. Marvell developed a chip for hard-disk drives that was small, cheap and very fast at reading the densely-packed bits of data on the drive platter. It took a couple of years of sales calls, but they landed disk-giant Seagate Technology Holdings (STX) as a customer. Marvell sold $21 million worth of chips in its first year of shipping.

That was 1999. Marvell went public the next year — amid the crash of the tech-stock market. But the company's growing revenues helped it buck the ebb tide, as nearly all the hard-drive makers adopted Marvell chips. The company had a knack for entering established markets with products that were a lap ahead of rivals. Chips for data networking and Wi-Fi hardware won business at Intel (INTC) and Cisco Systems (CSCO). In five years, Marvell revenues rose nearly six fold, to more than $1.6 billion for the fiscal year ended January '06.

Despite its fast growth, Marvell in some ways still resembled a family business. Sutardja's brother Pantas oversaw chip design, while his wife Dai was in charge of Marvell's communications products. The business was the focus of their lives. Sehat Sutardja says that he sleeps and breaths electronics, dreaming up patentable ideas in his free time. Dai worked just as hard. "Sometimes I'd even complain to her," says the CEO. "Why are you still at 11 o'clock at night talking to customers in Taiwan?" In Marvell's early days as a public company, the three founders took no stock options themselves. But they were plenty rich, owning 30% of the company.