In Second Biggest Exit Ever for Israeli Company, Chipmaker Mellanox Sold for $6.9 Billion

U.S. company Nvidia wins rumored bidding war with an offer 14% more than the company's share price

Yoram Gabison
Yoram Gabison
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A technician works in a Mellanox lab in Yokneam, Israel, March 4, 2019.
A technician works in a Mellanox lab in Yokneam, Israel, March 4, 2019.Credit: \ AMIR COHEN/ REUTERS
Yoram Gabison
Yoram Gabison

U.S.-based Nvidia Corporation agreed on Monday to buy the Israeli big-data chipmaker Mellanox Technologies for $6.9 billion, or $125 a share. The sale makes Mellanox a distant No. 2 in acquisitions of Israeli companies after Intel acquired auto-technology company Mobileye in 2017 for $15.3 billion.

The price, which reflected a 14% premium over Mellanox’s opening price on the Nasdaq on Monday, came after reports of a bidding war believed to have included Intel and Xilinx. Reports of buyers circling Mellanox had lifted its shares 66% since October, when financial news network CNBC reported it was on the block. On Monday, its stock was trading 8.5% higher at $118.64 a share late morning local New York time.

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Intel declined to comment on whether the company had bid for Mellanox, while Xilinx did not immediately respond to a request for comment.

Mellanox, which has offices in Yokeneam, in northern Israel, and the United States, makes chips and other hardware for data center servers used to provide cloud computing services. Its customers includes major manufacturers such as Dell and HP, which are building server farms for giants like Google, Microsoft, Facebook and Amazon.

"The acquisition will unite two of the world’s leading companies in high performance computing. 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,” Nvidia said in a statement.

Mellanox CEO Eyal Waldman.Credit: Ofer Vaknin

Data center revenue accounts for nearly a third of Nvidia's sales, which has grown at a rapid pace in the last few years under CEO Jensen Huang. However, a slowdown in China and a fading cryptocurrency craze have started to weigh on its sales in recent quarters.

Bernstein analyst Stacy Rasgon said Nvidia has been pushing more into networking and connectivity with its own tailored solutions and Mellanox would bring further expertise along these lines. "But going out and buying an asset right now, immediately after the recent spate of guide downs may raise a few eyebrows," said Rasgon. "It will probably spark questions as to whether Nvidia sees anything changing regarding the growth trajectory of their core data center business."

The big winners from the Mellanox acquisition are New York-based activist investment fund Starboard, which owns 5.8% of the company’s stock – down from the 10.7% stake it bought in November 2017. Other major shareholders include the U,.S. tech company Oracle, which owns a 4.1% stake it acquired when Mellanox was a startup.

Mellanox CEO Eyal Waldman, who co-founded the company in 1999, owns 3.6% of its shares, a stake that would earn him about $250 million. Employees own 494,000 stock options with an average strike price of $50.70. Managers own 3.3 million locked-up shares worth about $412 million.

The Israeli government will also be a beneficiary, though not to the extent it was from the Mobileye sale. Entrepreneurs pay between 25% or more in taxes, so Waldman will probably be liable for $65 million. Employees with share options are liable for a 25% tax, which should net the Israel Tax Authority about 33 million shekels ($9.1million)

The sale caps stormy 16 months for Mellanox and Waldman that began when Starboard began amassing shares in 2017. With a stake that reached as much as 10.7%, making it the company’s biggest shareholder, Starboard spearheaded an aggressive public fight to replace the Mellanox board and Waldman himself.

Starboard claimed that the board had failed to supervise Waldman adequately and that Waldman had failed at his job. The two sides eventually reached a compromise agreement in June, which brought three newcomers to the board. But the calm didn't last for long after CNBC reported in October that Mellanox hired a financial adviser to explore being sold after receiving takeover interest from at least two companies.

Rumors had swirled for months about potential buyers, including Microsoft, which reportedly hired Goldman Sachs to handle the negotiations, Intel and Broadcom. Another potential buyer was U.S. company Xilinx, whose executives were reportedly turned back by Waldman after they refused to raise their $5.4 billion offer.

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