11 March, 2019 /Woori BMO Group/ Nvidia Corp. won a recent bidding war for high-performance computing equipment manufacturer Mellanox Technologies Ltd., according to analysts at the wealth management firm Woori BMP Group, reporting Monday morning that the two companies had agreed to a deal priced at close to $7 billion.
Christian Harper, Director of EMEA Wealth Management at Woori BMO Group, commented, “Nvidia agreed to pay $125 a cash share for Mellanox US, which has never hit such a point in regular trading, even in the wake of rumors of Intel Corp, NTC and Microsoft Corp takeover bids. The price of around $6.9 billion represents a premium of 14.3% on Friday’s closing price of $109.38, and is more than 50% higher than the current rate since news first appeared from Intel’s interest in Mellanox on January 30th.”
It is undoubtedly the biggest purchase as a public corporation in Nvidia’s two-decade-plus history; according to FactSet records, Nvidia has never invested more than around $400 million on acquisitions in any single year before. Nvidia chief executive Jensen Huang acknowledged that the company’s purchase of long-time competitor 3DFX for $70 million and up to 1 million shares in 2002 was bigger when measured against Nvidia’s value at the time of the transactions.
Nvidia’s stock opened Monday at 0.6% then went higher with losses of over 1%. Shares in Mellanox ended up nearly 9% higher.
Mellanox produces high-performance computer chips and other devices, including networking hardware and interconnections. Nvidia and the Israeli corporation have already partnered together to build high-performance computers, mentioning in the statement that they have recently collaborated on the two largest supercomputers in the world that are run by the United States Energy Department.
Nvidia can use the equipment supported by Mellanox to improve its server business. Nvidia built its graphics chips into machine learning workhorses, piling them in data centers providing artificial-intelligence control in the cloud. It will now be able to offer even more facilities for these data centers to consumers and likely be able to combine the technologies in new ways.
“The rise of AI and data science, along with billions of simultaneous computer users, is accelerating the skyrocketing demand for data centers around the world,” Huang said in a statement. “Addressing this demand would involve comprehensive architectures that connect large numbers of fast computing nodes over intelligent networking networks to form a giant computing engine on a data center scale.”
Huang said the merged businesses should concentrate on high-performance computing “initially,” but indicated that he intends to move the strategy to a broader sandbox, potentially shifting the concept to hyper-scale data centers operated by major public-cloud vendors such as Amazon.com Inc. AMZN and Microsoft, -0.60%.
“For a very long time I assumed that Nvidia should go from a chip-level business to a server-level company to practically a data center-scale company,” Huang said in a conference call to address the contract.
“Mellanox went public in 2007, and in 2018 for the first time reached $1 billion in annual revenue. It had a net income of $134.3 million in GAAP in 2018, also a milestone, and has been profitable in 10 of the last 13 years, while generating positive free cash flow since 2005,” commented Andrew Williams, Director of Institutional Equity at Woori BMO Group.
In the conference call, Nvidia claimed that it is “not planning any cost synergies,” which means that it does not expect to make any cuts before integrating the firms. Mellanox will continue to operate outside Israel, and Nvidia said it would “continue to invest in local innovation and expertise in Israel, one of the largest technology centers in the world.”
The transaction was approved by both companies’ boards, and Nvidia said it would expect it to close before the end of 2019. Nvidia said it would pay out of cash on hand for the deal and did not plan to change its investor-return plans in response.