The acquisition of EZchip by Mellanox received a boost today from the largest consultancy to investment institutions in the US, ISS. ISS recommends its customers that hold shares in EZchip to vote in favor of the sale of the company to Mellanox for $811 million at the shareholders meeting scheduled for November 12. This is despite the fact that ISS's analysts state that "the sale process might not have been ideal."
At the same time, ISS recommends against the proposal by EZchip minority shareholder Raging Capital to appoint two new directors to the company's board. Raging Capital proposes this because of its opposition to the Mellanox deal.
ISS's rationale for its support for the deal is that it embodies reasonable value and multiples, and the downside for sales of EZchip's sales of future processors, following the announcement by EZhip's main customer Cisco that it will develop its next generation processors in-house. This happened in May, and EZchip and Mellanox started talks on a deal shortly afterwards. According to ISS, the main question is the company's ability to fill the gap in its revenue that Cisco will leave. Sales to Cisco give EZchip an almost 100% net profit, according to ISS. "The company was facing a turning point and it does not appear unreasonable that it started a sale process," ISS's report states.
"EZchip chose to start a sale process during a turning point in its business. As usual for a turning point, in particular for a company with the client concentration of EZChip, determining fair value leads to a wide range of outcomes. We believe that the sale process might not have been ideal, though the offer price of USD 25.50 in cash provides reasonable compensation for giving up the potential upside in a successful turnaround."
In recommending against the appointment of new directors on behalf of Raging Capital, ISS points out that such a move would usually be supported if the company had performed poorly for a long time, or if its directors had acted against the shareholders' interests, but says it does not believe that this is the case with EZchip.
Published by Globes [online], Israel business news - www.globes-online.com - on October 29, 2015
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