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$143 Billion Is Watching the Nvidia-Mellanox Deal

Alex Webb
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$143 Billion Is Watching the Nvidia-Mellanox Deal

(Bloomberg Opinion) -- In the context of the semiconductor industry’s $200 billion run of deals over five years, Nvidia Corp.’s $6.9 billion acquisition of Israel’s Mellanox Technologies Ltd. might appear insubstantial.

Its significance is in fact disproportionately large. Chipmakers the world over will closely follow the takeover of the data center equipment specialist for any indication that regulators, particularly in China, are again willing to approve semiconductor transactions. Intel Corp. is likely to cast a keener eye than most.

The industry’s acquisitions spree came to a grinding halt in 2018 after China failed to approve Qualcomm Inc.’s planned $44 billion purchase of NXP Semiconductors NV. The demurral had little to do with substantive antitrust concerns, and a lot to do with U.S. trade tensions.

That transaction bears similarities to Nvidia and Mellanox because in both cases the target does not, on the whole, compete with the buyer. NXP would have given Qualcomm greater exposure to the industrial and automotive businesses, and access to NXP’s strong customer relationships in those industries to sell its own products.

Nvidia will be able to do the same with Mellanox, according to Jean-Christophe Eloy, chief executive officer of semiconductor consulting firm Yole Developpement. Nvidia gets about a quarter of its revenue from the fast-growing data center market, and Mellanox will broaden that access while providing new channels for selling its existing lineup, he said.

Mellanox, whose net profit will more than double this year according to estimates compiled by Bloomberg, would also offset slowing growth at Nvidia’s core business. Analysts expect both revenue and profit at the Santa Clara, California-based company to fall in 2019, as demand for its chips from cryptocurrency miners and traders declines.

CEO Jensen Huang is paying 20 times forward earnings for the Israeli firm. That’s a premium to the 12 times earnings at which Intel, the dominant maker of chips for data servers, trades, but a discount to Nvidia’s own 28 times multiple. It looks like Huang has struck a good bargain.

China would need to approve the deal, given that the country accounted for 24 percent of Mellanox’s $1.1 billion of revenue in 2018. President Xi Jinping said in December that he would consider approving Qualcomm’s NXP acquisition were it presented to him again. The Nvidia-Mellanox deal will therefore be the first test of that sentiment.

Intel appears eager to do more acquisitions. Indeed, it bid against Nvidia for Mellanox, according to Bloomberg News. The semiconductor industry as a whole is sitting on $143 billion of cash, up from $97 billion four years ago, according to Bloomberg data.

If China gives Nvidia the green light, then chipmakers are likely to open their checkbooks again.

To contact the author of this story: Alex Webb at awebb25@bloomberg.net

To contact the editor responsible for this story: Jennifer Ryan at jryan13@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Alex Webb is a Bloomberg Opinion columnist covering Europe's technology, media and communications industries. He previously covered Apple and other technology companies for Bloomberg News in San Francisco.

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