Nvidia to Buy Mellanox for $6.9B

Nvidia reached a definitive agreement to acquire Mellanox Technologies for $125 a share in cash, giving the deal an enterprise value of about $6.9 billion. The proposed transaction would complement Nvidia’s product portfolio in high-performance computing for applications in artificial intelligence and big data analytics, with Mellanox’s specialty in providing interconnects for hyperscale data centers.

Nvidia will use cash on hand to seal the deal, which is expected to close by the end of this calendar year.

The graphics processing unit (GPU) vendor reportedly outbid Intel, Microsoft, Xilinx, and others in pursuing Mellanox. Intel’s interest was widely rumored for several weeks. This deal increases the competition between Nvidia and Intel, which has a significant business in data-center computing.

The deal would be the biggest M&A transaction in the semiconductor industry since Renesas Electronics agreed last September to acquired Integrated Device Technology (IDT) for around $6.7 billion in cash, a deal that is expected to close later this year.

This is the largest acquisition in Nvidia’s history, which dates back to its incorporation in April 1993.

“They’ve never attempted an acquisition of this size,” Kevin Krewell, principal analyst at TIRIAS Research, says about the proposed transaction. Nvidia has had mixed success in its history of acquisitions, such as the 2002 purchase of 3dfx Interactive’s assets and intellectual property, and buying Icera, he notes.

He predicts, “Mellanox will run independent for a while.” Nvidia will likely maintain the Mellanox brand, while making it clear that the acquired company is a subsidiary.

The previous collaborations between Nvidia and Mellanox apparently led to Mellanox inviting Nvidia to bid, according to Krewell. “They have had an ongoing business relationship.”

Mellanox management may have thought Intel’s purchase price undervalued the company. “It’s possible Mellanox wasn’t happy with the existing bids,” he says.

Once the merger is completed, Mellanox could start building its own switches, Krewell observes, “getting more aggressive, getting deeper into the data center.”

Krewell concluded, “Nvidia is doubling down on HPC.”

Dan Hutcheson, chairman and CEO of VLSI Research, says of the deal, “This makes a lot of sense.” At the same time, he says it is “not an obvious acquisition.” He adds about Nvidia, “It sort of fills a hole in their portfolio.”

High-performance computing requires fast interconnections, and Mellanox could fill that need with its Ethernet and InfiniBand capabilities, Hutcheson notes.

“You need multiple systems to get the compute power you need,” he notes. As the era of Moore’s Law winds down, “the computer requirements haven’t slowed,” Hutcheson says.

Jensen Huang, the co-founder and CEO of Nvidia, has moved the company forward into supercomputing, artificial intelligence, autonomous vehicles, and other technology. Huang is “one of the most dynamic executives in the industry,” Hutcheson observes.

While Mellanox is a healthily-growing enterprise, “it’s not like it’s cutting-edge technology” that it has, he concludes.

Mellanox counts Alibaba Group, Dell Technologies, JD.com, and Hewlett Packard Enterprise among its customers, Zacks Equity Research notes. Dell and HPE each accounted for 12% of Mellanox’s 2018 revenue, which was $1.089 billion, up 26% from 2017.

Boards accounted for $495.75 million of the Israeli company’s revenue last year, followed by switch systems ($247.48 million), InfiniBand and other ICs ($149.2 million), and cables, accessories, and other ($196.3 million).

The United States accounted for 37% of Mellanox’s 2018 revenue, at $402.84 million. China was the next largest market, at $258.45 million and nearly 24%. Europe represented $174.9 million and 16%. Other Americas accounted for $128.08 million (almost 12%) and other Asian countries provided $124.5 million in revenue (more than 11%).

In a statement, Nvidia’s Jensen Huang said, “The emergence of AI and data science, as well as billions of simultaneous computer users, is fueling skyrocketing demand on the world’s data centers. Addressing this demand will require holistic architectures that connect vast numbers of fast computing nodes over intelligent fabrics to form a giant data center-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 data center-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, CEO of Mellanox. “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.”