How will Mellanox Technologies Ltd.'s (Nasdaq:MLNX) management, headed by founder and CEO Eyal Waldman, respond to the investment in the company by activist fund Starboard Value? The fund is pressing Mellanox for operating improvements and consideration of alternative strategies. At this stage, the answer is still unknown. It is believed that since the Starboard Value's official report a week ago that it held 10.7% of Mellanox's shares, the two sides have been in contact, but no report on the matter has been published to date.
Last Thursday, a few days after Starboard Value's investment, an evening for the Mellanox's workers was held at the Tel Aviv Exhibition Grounds, with over 3,000 attendees. They enjoyed performances by Ivri Lider, Marina Maximilian, and the A-WA band. At that evening, Waldman hinted that he intended to remain at the company that he founded in the long term, telling the employees, "Allow me to tell you something of a more personal nature. I have been at Mellanox almost 20 years, more than a third of my life… I have experienced hard times here, together with amazing periods, and I'm all excited about the next 20 years."
On the way to cuts in expenses?
Mellanox develops and markets communications equipment for high-speed data transmission in organizational communications. Since Starboard Value's investment became known, Mellanox's share price has surged 13.3% to $57.90, reflected a market cap of almost $3 billion, following years of stagnation. The share price has mostly remained in the $40-50 range in recent years.
Starboard Value's investment signals to investors the possibility of increasing the share price, whether the fund demands changes in the board of directors leading to the sale of the company, for example, or whether Mellanox takes measures as part of a struggle against the fund.
Following Starboard Value's investment, Barclay's Bank today upgraded its recommendation for Mellanox's share from "Underweight" to "Market perform," six weeks after downgrading its recommendation for the share, and raised its target price from $47 to $55. Analyst Joseph Wolf wrote that a short-term positive technical event for the share was involved.
"Mellanox's response will be critical for its share's performance in the long term," Wolf writes. He says that Mellanox has good "raw material," but its upside depends on some degree of shakeup. He believes that Starboard Value can bring about such a change. In his opinion, the main risk is of a non-positive response by Mellanox to the advice/intervention by the investor, which is now the company's largest shareholder.
"The company published no official statement about Starboard Value, and has taken no steps whatsoever so far," Wolf writes. He says that the clearest area on which Starboard Value will focus is the level of Mellanox's spending on R&D and management and general expenses.
"On paper, it appears that Mellanox can compete with medium-sized companies in its field with a lower cost structure. At the same time, in our opinion, the company's success to date is a result of being the first in the market. It remains to see how cutting expenses will affect its strategy," Wolf explains.
Published by Globes [online], Israel Business News - www.globes-online.com - on November 28, 2017
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