Nvidia buys Mellanox for $6.9b

Eyal Waldman and Jensen Huang  photo: Niv Cantor

The deal is the second largest ever acquisition in the Israeli high tech industry.

After 20 years as an independent company and 12 years after its IPO on Nasdaq, Israeli technology company Mellanox (MLNX) is being sold. US company Nvidia will pay $6.9 billion cash to acquire it. Mellanox's share price is up by more than 9% in pre-trading in New York. The acquisition price values Mellanox at $125 per share, representing a premium of 14.2% on the market price.

The deal is the second largest ever in the Israeli high-tech industry, after the acquisition of Mobileye by Intel for $15.3 billion, and ahead of the acquisition of NDS by Cisco for $5 billion.

Mellanox develops and sells high-speed communications equipment using InfiniBand and Ethernet technologies. The past few years have seen a trend of consolidation in its field, with some large deals being struck. Mellanox itself made a large acquisition (in its terms) when it paid $811 million three years ago to buy Israeli company EZchip, which put Mellanox into the processors business. Last year, Mellanox launched the first product based on the combined technologies of the two companies.

In 2018, Mellanox surpassed $1 billion in sales for the first time, and posted a non-GAAP profit of $267 million.

Mellanox was founded in 1999 by its CEO Eyal Waldman, who left Galileo, together with Michael Kagan and Shai Cohen. In 2007, the company was floated on Nasdaq at a valuation of $510 million, with a share price of $17. The share price reached a peak of $120 in 2012, but after a series of disappointing results, it set into a decline. In late 2017, when the share price was ranging between $44 and $51, activist US-based investment fund Starboard Value started to accumulate shares, reaching an 11% stake. In letters to the company's management and board of directors, Starboard raised claims about Mellanox's low operating profitability in comparison with its peers, and demanded the replacement of the entire board (including Waldman).

Waldman and the board opposed Starboard's demands for cost cutting, arguing that this would choke off growth. For several months last year a proxy battle was fought, and for a while it looked as though Waldman might lose control of the company he founded. A shareholders meeting set for July was meant to vote on the membership of the board: the existing directors, or those proposed by Starboard.

A month before the meeting, the two sides reached an agreement settling the affair. Two independent directors nominated by Starboard were appointed to the Mellanox board, and operational targets were set, failure to meet which would entitle Staboard to appoint another director.

Mellanox's share price weakened following this agreement, but it started to rise again when towards the end of 2018 CNBC reported that Mellanox was an acquisition candidate. The potential buyer mentioned at the time was Xilinx, but then it turned out that other, larger companies were interested in Mellanox, and among the names mentioned were Intel, Microsoft, and Nvidia.

The buyer, Nvidia, has a market cap on Nasdaq of $91.3 billion, after a 38% decline in its share price in the past year. Nvidia develops and sells graphics processors, with AI components, for the gaming, autonomous vehicle, data center, cryptocurrency, and other industries. The acquisition of Mellanox will be Nvidia's largest acquisition deal in recent years. At the end of its last fiscal year, ending in January, Nvidia had $7.4 billion cash. The acquisition has been approved by the boards of directors of both companies, and is expected to close by the end of 2019.

The companies said in the announcement of the deal: "The acquisition will unite two of the world’s leading companies in high performance computing (HPC). Together, NVIDIA’s computing platform and Mellanox’s interconnects power over 250 of the world’s TOP500 supercomputers and have as customers every major cloud service provider and computer maker. The data and compute intensity of modern workloads in AI, scientific computing and data analytics is growing exponentially and has put enormous performance demands on hyperscale and enterprise datacenters. While computing demand is surging, CPU performance advances are slowing as Moore’s law has ended. This has led to the adoption of accelerated computing with NVIDIA GPUs and Mellanox’s intelligent networking solutions."

“The emergence of AI and data science, as well as billions of simultaneous computer users, is fueling skyrocketing demand on the world’s datacenters,” said Jensen Huang, founder and CEO of NVIDIA. “Addressing this demand will require holistic architectures that connect vast numbers of fast computing nodes over intelligent networking fabrics to form a giant datacenter-scale compute engine. We’re excited to unite NVIDIA’s accelerated computing platform with Mellanox’s world-renowned accelerated networking platform under one roof to create next-generation datacenter-scale computing solutions. I am particularly thrilled to work closely with the visionary leaders of Mellanox and their amazing people to invent the computers of tomorrow.”

We share the same vision for accelerated computing as NVIDIA,” said Eyal Waldman. "Combining our two companies comes as a natural extension of our longstanding partnership and is a great fit given our common performance-driven cultures. This combination will foster the creation of powerful technology and fantastic opportunities for our people.”

The companies have a long history of collaboration and joint innovation, reflected in their recent contributions in building the world’s two fastest supercomputers, Sierra and Summit, operated by the US Department of Energy. Many of the world’s top cloud service providers also use both NVIDIA GPUs and Mellanox interconnects. NVIDIA and Mellanox share a common performance-centric culture that will enable seamless integration.

Nvidia said that "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."

Mellanox was represented in the deal by Advs. Ehud Sol and Yuval Meidar of Herzog Fox Neeman (HFN) law office.

Published by Globes, Israel business news - en.globes.co.il - on March 11, 2019

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

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