Mellanox set to buy home networking co CopperGate

A cash and shares deal is likely at a company value of $150-200 million for CopperGate.

Sources inform ''Globes'' that InfiniBand developer Mellanox Technologies Ltd. (Nasdaq:MLNX; TASE:MLNX) is set to acquire home networking solutions provider CopperGate Communications Ltd. at a company value of $150-200 million in cash and shares. The deal is due to be closed over the coming month.

The tales of two Israeli high-tech have similar beginnings. The executives of both companies know each other well, both companies were founded around the same time, and both won "Globes" titles as promising start-ups: Mellanox in 2005 and CopperGate in 2007.

Mellanox is a fabless semiconductor company that develops high-speed connectivity processors for data center servers and storage held its IPO in early 2007 and now has a market cap of $520 million. Run by founder, chairman, president and CEO Eyal Waldman, it has $190 million in cash.

CopperGate VP worldwide marketing David Baum and director of VLSI and hardware design Israel Lifshitz cofounded the company in 2000. Gabi Hilevitz is CEO. The company is considered a flagship of Israel's start-up enterprise. The company has developed solutions for IPTV and high-speed home networking using existing telephone copper wire infrastructure. One of the dreams of Israel's high-tech industry, its investors and the market had hoped that it would hold an IPO at a company value of hundreds of millions of dollars.

However, the global economic crisis shut down Nasdaq's primary market and the company values of semiconductor start-ups plummeted. CopperGate faced a Hobson's Choice: either acquisition at a low company value, or try to raise a lot of money to make a large investment in order to maintain its leadership. In May 2008, the company bought the HomePlug AV business from Conexant Systems Inc. (Nasdaq CNXT), but this was not enough to keep it in the industry forefront for long.

There is no automatic synergy between Mellanox and CopperGate. Although they operate in parallel segments - high-speed communications processors - their technologies and target markets are utterly different. Mellanox targets the enterprise market, while CopperGate targets households. This means that a combined company would still need different technological foci, as well as separate financial, operational, and marketing structures.

Waldman has big ambitions. He has said that he wants Mellanox to begin a great corporation and a merger with CopperGate could be a springboard toward realizing this vision. Sources said that, early this year, Mellanox approached Barclays Bank plc (LSE: BARC) to look for a suitable acquisition target in Israel. Rival InfiBand developer Voltaire Ltd. (Nasdaq:VOLT) and CopperGate were the first choices.

The sources added that there was a breakthrough in the negotiations between Mellanox and CopperGate a few weeks ago, following Mellanox's good second quarter results and optimism about its market cap.

Financially, an acquisition of CopperGate will give Mellanox an immediate boost to its profits. CopperGate has been profitable for two years. According to shareholder Tamir Fishman Venture Capital (TASE: TFVC), CopperGate's return on equity was 28% in 2008, well above Mellanox's own return on equity of 10% for that year. Tamir Fishman's report also stated that CopperGate had plenty of cash.

In addition to Tamir Fishman, CopperGate's investors include Challenge Fund - Etgar, Carmel Ventures, Motorola Ventures, TechnoPlus Ventures Ltd. (TASE:TNPV), and European Technology Ventures Capital Ltd. A sale of the company to Mellanox would be a good exit for the funds, reflecting a return of 5-6 on the money, depending on the structure of the deal and the ratio of cash to shares.

Mellanox said in response that it does not respond to rumors.

Mellanox's share rose 0.3% at the opening on Nasdaq today to $16.40. The share rose 3% on the TASE to NIS 63.48.

Published by Globes [online], Israel business news - www.globes-online.com - on August 4, 2009

© Copyright of Globes Publisher Itonut (1983) Ltd. 2009

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