By Carlos Asorey, Lukas Bruell, Steven Skomra and Claire Camoin (Georgetown and University of Warwick) - Date: 31/03/2019
Overview of the deal
Acquirer: Nvidia Corporation
Target: Mellanox Technologies Ltd.
Estimated value: $6.9 billion
Announcement date: March 11, 2019
Acquirer Advisors: Goldman Sachs and Jones Day (legal side)
Target Advisors: Credit Suisse and JPMorgan Chase and Latham & Watkins and Herzog Fox & Neeman (legal side)
The US semiconductor company Nvidia won the race against its main competitor Intel to secure the acquisition of Mellanox Technologies. Mellanox’s technology is crucial in transferring information from one component to another, both within and between computers, as it makes cables and switches. Thus, the $6.9bn all-cash deal, including debt, will strengthen Nvidia’s business in data centres, which already accounts for nearly a quarter of its $11.7bn of revenues. The acquirer offered 125$ per share for Mellanox, while on the 8th March, it closed at $109.38, thus being a 14 percent price premium. But traders are not entirely convinced of the completion of the deal, with Mellanox trading up 8.6 percent to $118.62, still short of the bid from Nvidia. That gap may reflect concerns that chip deals have foundered on regulatory approval delays and blocks amid a trade dispute between China and the U.S.
“We share the same vision for accelerated computing as NVIDIA. 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.” - Eyal Waldman, Founder and CEO of Mellanox
Company Details (Nvidia Corporation)
Nvidia is an American technology company that specializes in the manufacturing and distribution of graphic processing units (GPUs) and other components such as System on a Chip units (SoCs).
- Founded in 1993, headquartered in Santa Clara, CA
- President and CEO: Jensen Huang
- Number of employees: 11,528 (2018)
- Market Cap: $107.9bn -EV: $102.5bn
- LTM Revenue: $11.7bn -LTM EBITDA: $4.1bn
- LTM EV/Revenue: 14.65x -LTM EV/EBITDA: 41.76x
Company Details (Mellanox Technologies Ltd.)
Mellanox Technologies is an Israeli technology company that specializes in the manufacturing and supplying of computer networking products.
- Founded in 1999, headquartered in Sunnyvale, CA
- President and CEO: Eyal Waldman
- Number of employees: 2,900 (March 2017)
- Market Cap: $6.4bn -EV: $6.0bn
- LTM Revenue: $1.1bn -LTM EBITDA: $250.9mn
- LTM EV/Revenue: 4.17x -LTM EV/EBITDA: 21.26x
Projections and Assumptions
Short term consequences
The companies have a long history of collaboration and joint innovation, thus the deal will unite two of the world’s leading companies in high performance computing. 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.
Nvidia faced a turbulent 2018’s end, as its fourth quarter is down by 24% total with a massive 45% year-over-year loss in gaming revenues, driven in large part by a decline in sales of graphics cards to cryptocurrency miners. The company expects to return to growth in its core gaming business in the quarter ending in July, but has alerted limited visibility among cloud computing clients. Therefore, the deal may flag up Nvidia’s need of consolidation to gain scale while battling rising costs and shrinking customer lists.
As Mellanox is a leading supplier of InfiniBand and Ethernet interconnect solutions, two common network connections used in Cloud system design, Nvidia's true potential lies on its ability to combine Mellanox’s high-speed networking products to drive more compute as soon as possible. The acquirer needs to first show how it best utilises its acquired assets although it is clear there are some advantages for the graphics portfolio by looking at the direction Infiniband will go. Mellanox will likely be immediately accretive to Nvidia's pro forma EPS in calendar 2020 by 8 percent, based on Bank of America’s research. Nvidia expects to see zero cost synergies; implying its near-term focus will be on "attacking future growth opportunities" instead of "harvesting current" opportunities. If Mellanox is able to generate 5-10 percent in cost synergies, the deal could ultimately be accretive to Nvidia's EPS by 10-15 percent.
Long term upsides
While Nvidia and Mellanox don’t currently have any overlapping operations, the deal is a long-term investment in Nvidia’s ability to integrate Mellanox’ networking chip operations with their own datacenter market of high-performance computing and artificial intelligence systems. Nvidia hopes that computing and networking will be able to come together in the future through continuous innovation to produce long term synergies and growth. By combining overlapping operations, Nvidia will be more capable of addressing heightened demand to create larger datacenter computing engines. The two companies have worked together for years in a partnership and the acquisition will allow Nvidia to innovate faster.
The acquisition of Mellanox also places Nvidia in a stronger position to compete against large rivals such as Intel, which holds 95% of the current datacenter market. Nvidia will likely be more competitive against competing companies such as Intel, Cisco, and Arista as it attempts to expand into new markets through Mellanox. Rivalry with Intel will likely rise over access to the GPU (graphic processing unit) and Ethernet cable/card markets. Cisco and Arista will also become new competitors of Nvidia through Mellanox’s data center business; although both companies currently hold much larger market shares than Mellanox in this business. The deal also comes as a defensive move by Nvidia against larger competitors Intel and Microsoft that were also engaged in bidding for Mellanox. By securing its acquisition of Mellanox, Nvidia is able to ensure that it is able to continue operating closely with Mellanox given their interconnected relationship.
Additionally, the deal may encourage a trend of consolidation in the overall semiconductor industry. Over recent years, companies in this industry have combined to gain economies of scale and battle rising costs and shrinking customer lists. Recent activity has slowed down, however, due to a difficult regulatory environment given U.S. and Chinese trade relations. Since other competitors were also involved in bidding for Mellanox, they may seek out different opportunities for M&A activity to better compete with Nvidia.
Risks and Uncertainties
The acquisition faces few approval and regulation risks. Mellanox shareholders will likely approve the transaction quickly as the acquisition price of $125 per share is an all-time high for the company’s stock and is over 2x the average share price from 2017. Additionally, the deal has already passed board approval, generating confidence in the support of top shareholders. Regulatory approval should not be difficult despite required approval from the U.S., China, and Europe. The deal is not large enough to face serious antitrust opposition and since the companies do not experience any product overlap the combined entity will not deter any competition. With the U.S. and China actively engaging in trade negotiations it is unlikely that either side will oppose regulatory approval over risk of breaking down negotiations. Unless trade relations are significantly damaged and the deal creates political backlash, such as was the case in Qualcomm’s blocked $44 billion acquisition of NXP in 2018, neither side seems to have much motivation to deny approval. However, the combined entity could also face the risk of continuing or worsening trade conflict given that both companies rely on Chinese sales for roughly 25% of their revenue. The company would be directly affected by imposed tariffs and will be reliant on the improvement of trade relations between the two countries. Nvidia would also face roughly $350 million in breakup fees if it were to back out of the deal now.
However, a lack of short and medium-term synergy revenues poses a potential risk for the company post-acquisition. Nvidia likely won’t benefit from large early stage synergies as a result of the deal given that the two companies engage in different operations. Nvidia’s management maintains that the acquisition is focused around accelerating innovation for the future and not producing early synergy revenue, however. If able to integrate the operations later on, the risk of long-term profitability will be significantly mitigated.
“Nvidia is 26 years old and we rarely make acquisitions, because generally we like to build, create new markets and develop new technologies for markets that have never been explored. We tend to build from scratch and tend to innovate from within, however, Mellanox is a one-of-a-kind treasure that is not possible to rebuild. That’s one of the reasons why we did something quite extraordinary for our company, to make such a large acquisition.” -Jensen Huang, Founder and CEO of Nvidia
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