Mellanox has been for sale for several months, and reportedly attracted the attention of Intel, Microsoft, and Xilinx, as well as Nvidia, which eventually bought it. Why did the company from Yokne'am arouse such interest from each of these major companies?
In order to understand this, it is necessary to understand the important role that Mellanox plays in today's computing world. At the dry technical level, Mellanox deals in the development and production of products for communications networks, meant for rapid transfer of data between servers and storage systems. It addresses the cloud and data centers market.
The entire world, and not just the technology sector or even enterprises in general, is at the start of an arms race. The goal: to build the infrastructure that will meet the computing needs of the era of artificial intelligence and Internet of Things, to be based on the fifth generation cellular infrastructure. This infrastructure is required both for businesses and for countries, in order to be able to run autonomous vehicles and smart cities, and to bring about breakthroughs in finance, science, and medicine. We are talking not just about the future, but also about the present, in the shape of growing dependence on the cloud both by individual users and by enterprises.
All this means the ability to store, process and transfer the mountains of data that the human race will generate, at the highest possible speed and the lowest possible cost. This is why, in the US-China trade war, semiconductor design and communications infrastructures are at the center of attention, with the two powers at the height of a declared race for world domination in artificial intelligence.
Fifth generation cellular networks will take care of speed of data transfer between end devices and data centers, mainly in the cloud. When it comes to processing speed within the data centers themselves, two factors are responsible, One is the processors. The other factor, less familiar to the general public, is the communications components produced by companies like Mellanox, which is not only the market leader in Ethernet, but is a long way ahead of the number two - Intel.
Two basic conditions prevail in the battle for computing supremacy. The first is that there is no player capable of supplying to itself or to others the whole chain of products required to ensure supremacy. They are all dependent on one other, in competition with one another, and sometimes both at once. The second is that the cost and difficulty of development and production work in favor of the strong players, and thus encourage a trend of mergers and acquisitions as a condition for survival. And so, in the past few years, the cake may have grown, but the number of players has steadily diminished.
A whole greater than the sum of its parts
Against this background, Mellanox's enormous importance can be better understood. For Intel, which was mentioned as a potential buyer, Mellanox is a competitor which it would have happily eliminated, adding its products to its arsenal, in which the outstanding acquisition is another Israeli company, Mobileye. Intel is a world leader in processors for desktop and laptop computers, and also for data centers. That is where the value it could have generated from an acquisition of Mellanox lies: strengthening of its position as a supplier of components for data centers - its own chips, and the Israeli company's communications components.
Then Nvidia entered the picture. Its technological interest in Mellanox stemmed from a similar place. Nvidia, contrary to its image, has for a long time been more than a graphics processors producer. In an interview with "Globes", Jeff Herbst, the company's vice president of business development, declared that it aspired to become the most important computing platform in the world. Nvidia is also entering Israel in a big way, nurturing its ties with the developer community here, and last October it even announced that it would set up a development center. At the first developers' conference that Nvidia held in Israel, eighteen months ago, its CEO Jensen Huang paid compliments on stage to Mellanox CEO Eyal Waldman.
Despite the similarity in technological motivation between Nvidia and Intel, their business motivations are clearly different. While Intel thought about removing a competitor from the field (a competitor that Intel tried and failed to beat), Nvidia has a huge appetite for moving up a league and getting onto the major companies' playing field. The whole formed by Nvidia and the Israeli company could be much greater than the entity that would have resulted from the swallowing of Mellanox by Intel. And unlike Intel, Nvidia will probably not encounter regulatory difficulties in completing the acquisition.
The idea of Microsoft as a potential buyer for Mellanox came from yet another place. Microsoft is one of Mellanox's main customers, buying cloud products from it. It would have wanted Mellanox not just in order to save costs and give itself a competitive advantage over Google and Amazon, but also in order to forestall the possibility of becoming substantially dependent on another global technology player. Nevertheless, Nvidia's motivation seems to have been stronger and clearer.
Will the price prove to have been low?
Nvidia is a younger company with fewer product lines, and so Mellanox's specific contribution to it is significant. Together with the Israeli company, Nvidia will be able to broaden its footprint in data centers, and compete head on with Intel. The combination of its artificial intelligence chips and Mellanox's high-speed communications components could turn out to be an effective infrastructure for the near future in technology.
Mellanox has in fact paired up with the hungriest and most agile player in the market, a step that will not only strengthen Nvidia's global standing, but could also strengthen the local semiconductors ecosystem by attracting investment and encouraging the founding of local startups in the field. The deal could thereby strengthen Israel's standing as one of the most important countries in this critical area. Nvidia's announcement states, "Once the combination is complete, Nvidia intends to continue investing in local excellence and talent in Israel, one of the world’s most important technology centers." Perhaps in the future an Israeli prime minister will yet stand on stage and complain, as happened in the case of the Google-Waze deal, that in retrospect $6.9 billion is a low sum for a deal like this, and Mellanox could have been sold for much more.
Published by Globes, Israel business news - en.globes.co.il - on March 11, 2019
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