Mellanox share price remains well below Nvidia offer

Eyal Waldman and Jensen Huang  photo: Niv Cantor

With the deal scheduled to be completed by the end of the year, Mellanox share price is 6.5% below what Nvidia will pay. What snags could torpedo the deal?

More than a week after US tech giant Nvidia announced that it is buying big data connectivity chipmaker Mellanox Technologies Ltd. (Nasdaq:MLNX) for $6.9 billion or $125 per share, the Israeli company is still trading at only $118 per share, with a market cap of $6.436 billion.

In other words, with the acquisition scheduled to close by the end of 2019, it would be possible to make a 6.5% profit over the next nine months, or 8.35% on an annualized basis. Not a bad return in this era of uncertainty and low interest rates.

Some deals do hit snags and fail to be completed, thus the spread between the current share price and the price Nividia is offering. So what is the risk of the deal not being completed?

Both companies want the deal and shareholders are highly unlikely to reject the handsome premium they are getting. The US and European regulators should pose no problem with few of the antitrust issues involved had a bigger player like Intel tried to buy Mellanox.

The main fly in the ointment is the Chinese regulator, who has been causing problems due to the trade war between the US and China. Last year at the height of the trade tensions, writes "The Meticulous Investor" in its recommendation to go long on the Mellanox deal spread and buy, the Chinese regulator nixed Qualcomm's acquisition of NXP Semiconductor.

However, China is being more conciliatory now, as demonstrated by its recent approval of US company KLA-Tencor's $3.4 billion acquisition of Israeli electronics company Orbotech, after months of foot-dragging.

Nevertheless, the diplomatic brinkmanship between the US and China could always descend into open trade warfare, even if that is not what both sides especially want. Maybe this was the reason that activist investor Starboard already sold its entire holding in Mellanox last week at $118 per share, preferring not to take any risks. There are also a plethora of unforeseen circumstances that could arise that add to the risk.

Of course, even in a worst case scenario, if the deal were to break down, Mellanox, still led by its founder and CEO Eyal Waldman, would remain a highly coveted company with a bright technological future. That 6.5% profit might be lost in the short term but in the medium to long term, the shares could potentially yield even larger returns.

Published by Globes, Israel business news - en.globes.co.il - on March 21, 2019

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

Eyal Waldman and Jensen Huang  photo: Niv Cantor
Eyal Waldman and Jensen Huang photo: Niv Cantor
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