EZchip's (EZCH) shareholders will convene onNovember 12 at the company's offices in Yokne'am to vote on the acquisition of the company by Mellanox (MLNX). Yesterday, EZchip published the notice of the meeting, which still does not give full details of the negotiations with Mellanox. Last week, the two companies announced that Mellanox would buy EZchip in an $811 million cash deal, giving an enterprise value (EV) of about $620 million excluding EZchip's cash.
Mellanox, run by Eyal Waldman, provides equipment for rapid enterprise data transfer, while EZchip, run by Eli Fruchter, develops processors for routers in large communications networks.
After the acquisition announcement, Credit Suisse published a list of previous deals in the semiconductor market, pointing out that the EV to sales (one year forward) ratio in the Mellanox-EZchip deal is 4.8, and the premium is 16%, compared with an average ratio of about 3 and a premium of 22-23% in the comparable deals. "From a strategical perspective, the acquisition increases Mellanox's footprint and opportunity in the data center and WAN Mellanox believes that EZchip will expand its overall total available market by $2 billion to $14 billion plus by 2017," analyst John Pitzer writes, but adds, "While we view the EZchip announcement as positive and a step towards building the scale necessary to compete in the Data Center/Cloud/Service Provider segments of the market, EZchip’s recent setbacks at Cisco to internal silicon and the still looming competitive threat of Intel in core fabric seems to point to a balanced risk/reward profile for the stock."
On October 1, Mellanox raised its third quarter revenue guidance to $169-171 million from $165-170 million. Credit Suisse sees implied earnings per share of $0.70, versus $0.69 based on prior guidance parameters, and says that while Mellanox did not comment on the fourth quarter, "we believe the company is at least tracking to Street revenue/EPS of $171.5 million/$0.68." Credit Suisse rates Mellanox "Neutral", with a $50 price target. The stock closed at $43.42 in New York yesterday.
Oppenheimer & Co. managing director Sergey Vastchenok wrote after the acquisition announcement, "On the face of it, the two companies operate in completely different fields, and the synergy between them is therefore not substantial. Nevertheless, the main rationale behind the acquisition from Mellanox's point of view is EZchip's new product, NPS."
Vastchenok adds, "This product, developed secretly at the Kiryat Gat development center and unveiled in early 2013, has two advantages in comparison with the company's previous product families. Firstly, it serves most of the communications layers (layers 2-7), that is, not just the high layers of routers and switches, but also the end-user application layers (including data security, network traffic management, load balancing, DPI, and so forth).
"Secondly, the NPS can be programmed using C, and not the machine languages as in previous generations of EZchip processors. This broadens the range of development and programming possibilities from the point of view of the company's customers. These two advantages position the product as suitable not just for telecommunications companies, an area that for several years has suffered from weakness in CAPEX budgets, but also for the data center market, which represents the main growth engine both for the telecommunications equipment market generally and for Mellanox specifically."
Published by Globes [online], Israel business news - www.globes-online.com - on October 8, 2015
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