Confirming earlier rumors, NVIDIA NVDA announced the acquisition of high-speed interconnects and networking solutions provider Mellanox Technologies MLNX for $125 per share in cash. This represents a total enterprise value of roughly $6.9 billion, higher than Intel’s INTC $6 billion offer made in January 2019.
Per CNBC, the all-cash offer represented a premium of 14% to Mellanox’s closing price on Mar 8. The “definitive” agreement followed a bidding process that reportedly included Intel and chipmaker Xilinx XLNX. Per TechCrunch, Microsoft was also interested in Mellanox.
The Israel-based Mellanox is one of the major suppliers of 25, 40, 50 and 100GB Ethernet adapters, switches and cables. Per Crehan research estimates, the company had a market share of 69% in the high-speed Ethernet adapter business during third-quarter 2018, leaving Intel, Broadcom and other peers trailing.
Further, robust demand for its InfiniBand solutions is noteworthy. Mellanox’s customers include datacenter owners and also the companies that build datacenter. Notable clients include Alibaba, JD.com, Dell and Hewlett Packard Enterprise.
In fact, NVIDIA computing platform and Mellanox's interconnects support more than 250 of the world's TOP500 supercomputers, including the world's two fastest supercomputers, Sierra and Summit, operated by the U.S. Department of Energy.
The deal is immediately accretive to NVIDIA’s non-GAAP gross margin, non-GAAP earnings per share (EPS) and free cash flow. The transaction is expected to be completed by the end of calendar year 2019.
NVIDIA Corporation Price and Consensus
NVIDIA Corporation Price and Consensus | NVIDIA Corporation Quote
Mellanox Buyout to Aid NVIDIA’s Datacenter Expansion
NVIDIA’s takeover of Mellanox will definitely expand its market share in datacenter space. The Mellanox combination now also makes the company a preferable choice for hyperscale customers. Moreover, the deal will help in reducing NVIDIA’s overdependence on the gaming industry.
Management at NVIDIA stated that “With Mellanox, NVIDIA will optimize datacenter-scale workloads across the entire computing, networking and storage stack to achieve higher performance, greater utilization and lower operating cost for customers.”
In fact, the acquisition expands NVIDIA’s total addressable market (TAM) by more than $60 billion (includes $50 billion in computing and $11 billion in high-speed networking).
Notably, datacenter accounts for almost 30% of total revenues. In the last-reported quarter, datacenter sales slowed down due to lower hyperscale and cloud purchases along with a temporary pause in cloud spending. However, with growth in AI-related investments by cloud giants, demand is likely to pick up, and the Mellanox acquisition is a key catalyst in this regard.
Moreover, the deal strengthens NVIDIA’s competitive position against the likes of Intel and Advanced Micro Devices AMD, particularly in the datacenter space.
China Can Be a Roadblock for the Deal
The completion of the NVIDIA’s Mellanox deal is subject to regulatory approval in China, which can be a headwind. Per Bloomberg, both the companies generate significant amount of sales from China, the biggest market for semiconductors. Notably, Alibaba and Baidu are two big Chinese customers of Mellanox.
However, given the uncertainty in trade relationships amid the unsolved trade dispute between the United States and China, the approval is not guaranteed. Moreover, protectionist policies currently followed by both the countries, particularly China in this case, can be a big roadblock for the deal.
For instance, Qualcomm failed to seal the NXP Semiconductors NV acquisition deal after it didn’t receive China’s approval. The United States also vetoed Broadcom’s acquisition offer for Qualcomm in 2018.
Nevertheless, NVIDIA expects that it will get the approvals by the end of the year. Notably, per agreement, Mellanox will pay a $350-million termination to NVIDIA if it accepts a rival offer. However, a regulatory roadblock will be detrimental for both the stocks.
NVIDIA currently has a Zacks Rank #5 (Strong Sell).
Mellanox has a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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