MLNX Mellanox Technologies Ltd

With Mellanox deal, chip maker seeks to bolster its position in cloud computing

By Asa Fitch 

This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (March 12, 2019).

Nvidia Corp. agreed to acquire networking firm Mellanox Technologies Ltd. for about $6.9 billion, its largest deal by far as it bolsters its bet on cloud computing after suffering a stinging drop in its core graphics-chips business late last year.

The combination, announced Monday, marks the latest foray by Nvidia beyond chips known as graphics processing units. While Nvidia has pushed into artificial-intelligence applications and grown its data-center business in recent years, much of its growth has been rooted in finding new uses for its chips rather than venturing into entirely new areas.

With Mellanox, Nvidia is buying a maker of Ethernet switches and adapters that connect computers to each other, wiring together networks where users can rapidly exchange information. The company is a major supplier of equipment that conforms to the so-called InfiniBand networking standard widely used in supercomputers.

Nvidia's acquisitions outside the graphics-chip arena have been few, and none of its deals are in the same financial orbit as Mellanox's. It paid $367 million in 2011 for the modem-technology company Icera, its largest disclosed acquisition before the Mellanox deal, a spokesman said. Nvidia wound down that business in 2015.

"We rarely do deals, and the reason is on balance we really prefer to build" new businesses, Nvidia Chief Executive Jensen Huang said in an interview.

Nvidia, based in Santa Clara, Calif., will pay $125 a share in cash for Mellanox, a 14% premium to the company's closing price Friday of $109.38.

Shares of Nvidia, which have been battered in recent months, rose 7% to $161.14 on Monday. Mellanox shares rose 7.8% to $117.89.

The transaction, expected to close by end of 2019, would immediately add to Nvidia's gross margin and bottom line once completed, the company said. On a call with analysts, finance chief Colette Kress said Nvidia doesn't expect to change its plans to return $2.3 billion to shareholders in the current fiscal year on top of what it already has done.

Nvidia's chips, long designed to enable advanced graphics for videogames, have proven well-suited to difficult computing tasks, and are widely used in high-performance computing and cloud infrastructure by companies such as Amazon.com Inc. and Alphabet Inc.'s Google.

The rise of cryptocurrency mining and artificial-intelligence applications that also made heavy use of Nvidia's chips propelled the company's sales in recent years and sent its stock price soaring.

But Nvidia suffered a reversal last year, in large part because cryptocurrency prices fell sharply and mining became unprofitable.

Mr. Huang had called Nvidia's most recent quarter "a real punch in the gut" after revising quarterly revenue guidance downward by $500 million due to slow sales of its latest graphics chips for videogames and the hangover from the cryptocurrency bust. The company's shares fell from almost $290 in October to around $151 at Friday's close.

The Mellanox acquisition likely will add modestly to Nvidia's profit and could be a good strategic fit, according to Bernstein Research analyst Stacy Rasgon, though he said some investors might scratch their heads about the timing of the deal.

"It's not uncommon from growth companies that hit headwinds to start buying stuff, and people wonder: Is the view on the core business changing?" he said.

Mr. Huang said the deal meshed with Nvidia's view that the future is about constructing a fast, interconnected fabric of computing power in data centers. "We have some short-term challenges that are largely behind us," he said. "Our investment thesis -- our company's thesis -- remains intact."

Mellanox, which has operations in the U.S. and Israel, has been up for sale since last year, according to a person familiar with the matter. Its market capitalization was around $5.9 billion as of Friday's close.

The deal is among the largest involving an Israeli company, valued at slightly less than International Flavor & Fragrances Inc.'s acquisition last year of Frutarom for $7.1 billion including debt. Intel Corp. in 2017 signed a $15.3 billion deal to buy the car-camera pioneer Mobileye NV.

Israel has been trying to position itself as a major producer of tech related to artificial intelligence. The country had 1,150 AI-related companies at the end of 2018, up from 512 in 2014, according to Start-Up Nation Central, a Tel Aviv-based nonprofit. Nvidia opened a research and development center in Israel in October.

Mellanox reported $1.09 billion in revenue last year, compared with Nvidia's sales of $11.72 billion in its fiscal year ended Jan. 27. Nvidia employs around 13,000 people, according to its most recent financial report, about five times as many as Mellanox.

Felicia Schwartz and Kimberly Chin contributed to this article.

Write to Asa Fitch at asa.fitch@wsj.com

(END) Dow Jones Newswires

March 12, 2019 02:47 ET (06:47 GMT)

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