Nvidia on Monday agreed to buy rival Mellanox Technologies for $6.9bn, including debt, in the biggest deal ever for the US semiconductor company as it seeks to bolster its business in data centres.
The all-cash deal would help Nvidia shift its focus away from the gaming industry, which has been hit by slowing economic growth in China and the waning cryptocurrency fervour.
Nvidia said it would pay $125 a share for Mellanox, a 14 per cent premium to the group’s closing share price on Friday. The chipmaker beat Intel in a competitive race to secure Mellanox, which is based in both the US and Israel, said one person involved in the bidding process.
Intel is one of the biggest foreign investors in Israel. Just two months ago, the chipmaker announced plans for a $11bn production and research facility in the country. Intel purchased Mobileye, a Jerusalem-based maker of sensors and cameras for computer-assisted and autonomous driving, for $15.3bn in 2017.
Mellanox, which reported sales of $1.1bn last year, makes cables and switches that transfer data between servers, storage systems and infrastructure equipment. The technology will complement Nvidia’s graphics processors, which despite their origins in visual effects and computer games, are increasingly used in machine learning systems.
“The emergence of [artificial intelligence] and data science, as well as billions of simultaneous computer users, is fuelling skyrocketing demand on the world’s data centres,” said Jensen Huang, the founder and chief executive of Nvidia. “This type of workload is simply too big to fit on any one computer . . . Thousands of computers have to be networked together.”
The two companies said the combined entity will serve every big provider of cloud computing services and power more than half the world’s fastest supercomputers, with customers such as Dell, Google owner Alphabet and IBM.
Nvidia and Mellanox have partnered for several years, but acquisition talks began only recently, Mr Huang said on a conference call on Monday morning.
“We would like to accelerate growth into data centres by being able to architect across both the compute as well as the network fabric,” he said, saying the deal was part of a broader strategy to change Nvidia “from a chip and system-level company to a data centre-scale company”.
The transaction is expected to close before the end of 2019, and will be funded by cash on Nvidia’s balance sheet. The deal will require regulatory approval in the US, China and other jurisdictions, Nvidia said.
Nvidia generated roughly a quarter of its $11.7bn of revenues from its data centre business last year, which was dwarfed by its sales to gamers who want to supercharge their PCs. The company faced a turbulent end to 2018 as its gaming division’s sales slid, driven in large part by a slump in sales of graphics cards to cryptocurrency miners.
Nvidia has said it expects return to growth in its core gaming business in the quarter ending in July, but has warned of limited visibility among cloud computing clients.
Executives warned investors and analysts earlier this year that its total revenues in 2019 would be flat or decline. Shares of the California-based company have declined 48 per cent from a record high hit last October.
Mellanox competes primarily with Intel in the market for a specialised form of networking technology designed for high-end servers and supercomputers, called InfiniBand.
The InfiniBand standard was originally developed in the late 1990s during the dotcom boom, but adoption stagnated after the bubble burst. Mellanox also sells Ethernet networking technology, which is more widely used across PCs and data centres.
The $12bn-a-year high-performance computing market caters primarily to clients in bio-sciences, aviation, defence, government and academic research. Hyperion Research, which tracks the HPC market, predicts the HPC market to grow to around $20bn by 2022.
“Where compute starts and networking starts and ends is going to become harder to see,” Mr Huang said. “The entire data centre becomes one giant compute engine.”
The transaction is a win for activist investor Starboard Value, which had bought more than a tenth of Mellanox and called for the company to explore a deal to bolster its share price. The activist sold some of its position after Mellanox last year agreed to add new directors to its board, but it remains the company’s largest stockholder, according to data provider Refinitiv.
Mark Lipacis, an analyst with investment bank Jefferies, said he viewed the takeover “favourably” for Nvidia, writing that Mellanox technology was “uncorking the bandwidth bottleneck between large amounts of data and the processors that process them”.
Nvidia shares rose 1 per cent in pre-market trading on Monday to $152. Mellanox gained 9 per cent to $118.93.
Goldman Sachs provided advice to Nvidia while Jones Day served as legal counsel. Credit Suisse and JPMorgan Chase advised Mellanox and law firms Latham & Watkins and Herzog Fox & Neeman offered legal advice to the company.
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