The $811 million deal was put together in an unusual place - an oriental-style restaurant in Yokne'am - and became official yesterday, when Mellanox (Nasdaq: MLNX) announced the acquisition of EZchip Semiconductor (Nasdaq: EZCH). "Eyal and I meet frequently, every time at a different restaurant in Yokne'am, and exchange ideas," EZchip founder and CEO Eli Fruchter said at today's press conference about his relationship with Mellanox founder and CEO Eyal Waldman. "It was fairly clear that we would join together someday. I had always hoped that EZchip would buy Mellanox, but it turned out the other way around, and it really doesn't matter. There is an opportunity here to create a big, strong Israeli company, and I think that there is no-one more suitable than Eyal to lead such a company."
"We've been talking about the merger for several years," Waldman said, "We sat in the Al Babur restaurant in Yokne'am a great deal, and put on several kilos together. In the past few years, the circumstances weren't right. Now they are.
"The deal is good for the shareholders of both companies," Waldman continued, "EZchip is a very profitable company, and it does very smart things. It has considerable processing capabilities, elements that we were lacking. The combination of very fast transmission with the intelligence of the processing will enable Mellanox not just to transfer data, but also to process it, and to add cyber security capabilities, offload, and more. We are happy to take on the team that Eli nurtured. Yesterday, I saw real tears in the eyes of the EZchip employees, who love Eli and feel connected to him."
EZchip mainly addresses the service provider market through its customers, but with the acquisition of Tilera in 2014 it expanded into the data center market, and, according to Fruchter, the logic of the combination with Mellanox lies there.
Waldman said that the plan was initially to take EZchip's products and offer them to Mellanox's customers, including server and storage companies, and vice versa, to offer Mellanox's products to EZchip's customers. In the second stage, in 2017-2018, products will be launched that include the know-how of both companies. "We will be very happy to boost Mellanox's revenue from Cisco, EZchip's biggest customer. Perhaps together we will be able to keep Cisco as a customer. We will also be able to add Huawei and ZTE to Mellanox's customer list and expand the revenue from them," Waldman said. Cisco accounts for 35% of EZchip's revenue, but a few months ago it announced that it would not use EZchip's next generation processors, but would use processors developed in-house instead. Waldman and Fruchter commented on this too. According to Fruchter, the hit to revenue will come in 2019-2020, and no problem is foreseen until then. "There is no doubt that, even alone, EZchip would have succeeded in offsetting the damage, and together with Mellanox this is completely certain. Cisco's decision could also yet change; we don’t think that the last word has been said on the matter."
Last May, Cisco's decision wiped off a quarter of EZchip's market cap. It has recovered since. The negotiations with Mellanox began at that time. "When we started to talk, the share price was at $15, and the premium I demanded was 70%," Fruchter said. The deal was closed at $25.5 for each EZchip share, 16% above Tuesday's closing price. "As time went by and we released good results and several design contract wins in the data center area, the share price rose and the premium shrank. You have to look at the premium on the price 30-90 days previously."
"Fruchter stressed that "as a public company we are of course committed to maximizing value for the shareholders, and we therefore did what had to be done. When the notice of the shareholders' meeting (to approve the deal, S. H-W) is published, it will include the entire process. Everything was done in a serious manner."
"The negotiations were very interesting," Waldman said. On the financing for the deal, he added, "We will finance it from money we have at the bank, and from a $300 million loan from a syndicate of banks. All things considered, money is cheap at present, and this is what the investors expect us to do. The company will continue to generate cash, and there will be no substantial problem in repaying the money."
Fruchter concluded with a retrospective look at EZchip as an independent company. "EZchip was founded at a time when there were 25 competing companies in the network processor market, some of them big ones. Over the years, we managed to produce innovative and ground breaking technology, and we expanded our market share. 2-3 years ago, we became a leading player in the market, when other players, including Broadcom and Marvell, left it. EZchip is an amazing company with amazing people and amazing technology, a special phenomenon in the high-tech market. We are very proud of what we have done."
"We look at the market, and we see consolidation," Fruchter added, "Huge deals of Broadcom-Avago, Intel - the semiconductor market is going to be a market of large companies, and we thought it would be right to be part of a large company."
Nevertheless, even after the acquisition, Mellanox will not be an industry giant - far from it. Does this mean that, at some stage, it too will necessarily be sold, and will not continue as an independent company? "Mellanox will remain independent as long as the management thinks that the return on investment and the ability to grow independently are greater than in a sale. We believe that we can grow organically and with EZchip in both revenue and profits."
What will Fruchter do?
"I hope Eli will remain in the picture," Waldman said in the course of the press conference. Asked about his plans, Fruchter replied with a smile, "Apparently I should have turned up here in a Hawaiian shirt and flip-flops. In the next few months, I will assist Eyal with the integration, and I very much want it to succeed. It is very important to me that my people should enjoy life in the joint company. Once that happens - I'm sixty this year, and I think that that's enough. A CEO year is like a dog year, seven years. I'll tell you a secret. At home, I have the biggest aquarium in the world, 35,000 liters, like a swimming pool. Once a week, I dive in and clean it. Now I'll dive every day."
Published by Globes [online], Israel business news - www.globes-online.com - on October 1, 2015
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