Mellanox employees disgruntled over Nvidia sale

Mellanox ASAP Creative Shutterstock

Mellanox allocated no options to its employees in recent years and has not awarded an acquisition bonus but employees do hold many restricted shares.

Not everyone is happy about the impressive exit of Mellanox Technologies Ltd. (Nasdaq:MLNX), sold this week to Nvidia for $6.9 billion. "Globes" has heard of cases of anger and frustration among the company's employees. One of them said, "CEO Eyal Waldman stuck it to all of us."

Waldman himself is one of the biggest beneficiaries of the deal; he will come away with $230 million. At a press conference, Waldman said that as a result of the acquisition, the employees would get "A great deal of money. I estimate that the employees own 7% of the company, adding, "It's not an acquisition of buildings or products, but of people, and they are committed to taking care of the people. The people at Mellanox will benefit from the merger both economically and technologically."

Are the employees' complaints justified? The reports by Mellanox show that in contrast to many high-tech companies, Mellanox allocated no options to its employees in recent years. The company's most recent allocation of options was in 2014, when Mellanox distributed 50,000 options to its employee. No options were awarded in 2015-2018.

At the same time, Mellanox allocates restricted shares to its employees each year, amounting to nearly six million restricted shares in the past four years. As of the end of 2018, Mellanox employees held 3.3 million restricted shares with a fair value of $65 each (the share price in the Nvidia deal is $125 per share). Even though the company has stopped allocating options, employees still had 495,000 options with an average price of $50.70 as of the end of 2018. These options are well in the money.

When the acquisition deal is completed, Mellanox's employees will have to sell their shares in the company at the market price and pay tax on them. Nvidia will convert the employees' restricted shares in Mellanox that have not yet vested into Nvidia shares with the same value. Other than the rise in the share price, if the deal is successful, Mellanox's employees will not benefit from the exit, because most of them have no options to exercise. As far as is known, the employees received no bonus following the acquisition.

Is Mellanox miserly in its capital remuneration for its employees? A check by "Globes" shows that the company is average or slightly above average in the allocation of options. For the sake of comparison, the figures of a number of companies that Mellanox itself classes as a comparison group (for the sake of assessing senior executive salaries) - Marvell Technology Group (Nasdaq: MRVL), CyberArk Software (Nasdaq: CYBR), NICE Systems (Nasdaq: NICE), Wix.com (Nasdaq: WIX), and Cirrus Logic (Nasdaq: CRUS) - were checked.

The allocation of restricted shares at Mellanox is in the middle. Marvell, for example, is far more generous, while NICE Technologies gives less. In the distribution of options and restricted shares for all of the company's employees, Mellanox employees hold more restricted shares on the average than the other companies, but fewer options. The check was for the purpose of the comparison. In practice, different employees hold different numbers of options. A senior manager probably gets more options than a junior employee.

According to the total number of options and restricted shares held by the company's employees (based on 2017 data, because not all of the companies have published figures for 2018), it appears that Mellanox is in the bottom part of the table. There are problems with this comparison, however, because the exercise price in the options also has to be taken into account.

Mellanox, founded in 1999, held its IPO on Nasdaq in 2007 at a company value of $510 million and a share price of $17, which five years later reached a peak of almost $120. The company passed the $1 billion mark in revenue for the first time in 2018 with $1.09 billion in revenue, 26% more than in 2017. Founded and managed by Waldman, Mellanox develops and markets communications equipment for high-speed data transmission, based on semiconductors.

The share price for Nvidia's acquisition of Mellanox is $125, a 14.2% premium on the Nasdaq price before the acquisition was reported and higher than the $120 peak reached by the share in 2012, which the share has neared in recent months, when Mellanox was cited as an attractive target for acquisition. Nvidia and Mellanox say that the deal will be completed by the end of 2019, subject to obtaining the required approvals, including from Mellanox's shareholders.

The acquisition of Mellanox by the US giant is one more link in a chain of sales of Israeli public companies in recent months, in the wake of Frutarom, Sodastream, Mazor Robotics, and Attunity. What all of these companies have in common is that they announced their acquisition at a time when their business was booming and it was believed that they could have continued growing independently.

Mellanox said in response, "We are product that all of Mellanox's employees, including the students, are benefiting from the company's success and are eligible for the same remuneration elements, among them a competitive salary, social benefits, bonuses linked to the company's success, an excellent employee stock purchase plan (ESPP), and a share component, both when they are hired and on a yearly basis."

Published by Globes, Israel business news - en.globes.co.il - on March 13, 2019

© Copyright of Globes Publisher Itonut (1983) Ltd. 2019

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