Mellanox Takeover of EZchip Delayed Amid Shareholder Opposition

Israeli chip maker gives investors another month to weigh alternatives, but says it won’t improve offer of $25.50 a share.

Ofer Vaknin

Mellanox’s $811 million takeover of fellow Israel chip maker EZchip appeared in jeopardy on Thursday after Mellanox extended the deadline for EZchip shareholders to vote on the deal just hours before it was due to expire.

Mellanox, whose takeover offer had been opposed by some major EZchip shareholders, said it would give investors another month to weigh its offer of $25.50 a share and see if any competing bids emerge. But the company said it would not improve the offer itself.

“The Mellanox offer of $25.50 per share is full, fair and firm, and highly attractive for EZchip shareholders compared to peers and precedent semiconductor transactions,” Mellanox CEO Eyal Waldman in a statement issued just two hours before the 5 P.M. Thursday voting deadline.

Shares of Mellanox were down 0.7% at $46 in early trading in New York. EZchip was up 1.8% at $24.47.

The two companies are both based in the northern town of Yokne’am.

Speculation was that Mellanox and EZchip’s board, which supported the acquisition, feared they didn’t have the 75% majority needed to clear the deal. Raging Capital, a New Jersey-based hedge fund whose 6.7% stake makes it the biggest shareholder in EZchip, had led the shareholder rebellion, saying the offer undervalued the company and that it would do better remaining independent.

In an apparent reference to Raging Capital, Waldman criticized what he termed “the misinformation about EZchip and its board’s process” that was being circulated by an unidentified shareholder.

“We believe these amendments and the extension will conclusively demonstrate that our offer represents the best available option for EZchip shareholders and that voting for the transaction is in EZchip shareholders’ best interests,” he said.

Mellanox’s $25.50-a-share offer was a 16% premium on EZchip’s share price when it was first made September 29. That assessment was backed by Institutional Shareholder Services and Entropy, two shareholder advisory firms.

EZchip said it approached eight other semiconductor companies about making a counter-offer, but none had expressed an interest. In a letter to shareholders on Monday, Raging Capital said the company had failed to explore alternative offers and would do better if it remained independent.

“We are aware of other suitors who are interested in EZchip and who have contacted EZchip and/or its banker in order to express their interest. Unfortunately, EZchip did not enable anyone but Mellanox to get in the door,” Raging Capital’s CEO William C. Martin said in the letter, accusing EZchip CEO Eli Fruchter of pursuing his own personal interest over that of other shareholders.

Like others in the business, Mellanox and EZchip have been riding the wave of smartphone, Internet video and big data usage. Coming next is the so-called Internet of Things, which will create a giant class of devices such as electricity meters that are connected to the web.

But EZchip has faced obstacles in exploiting favorable market conditions and has been reliant on a small number of customers. That risk was evidenced when Juniper Networks, which once accounted for half its sales, broke off with EZchip after it learned that its archrival Cisco had begun buying EZchip technology. In May, Cisco said it would develop an in-house chip instead of using EZchip’s next-generation product.

Nevertheless, given the long product cycles, the impact of Cisco’s exit won’t be felt for a few more years, and Raging Capital has made the case for the company to remain a standalone.