Last week, when the management of EZchip Semiconductor Ltd. (Nasdaq: EZCH; TASE:EZCH) cancelled their participation in two investor conferences in the US, they presumably did not imagine the turbulence that it would cause in the company's share price. Last minute cancellations of appearances at investor conferences, with no specific explanation, have always generated waves of rumors, and almost always the most popular rumor is that the company must have received an acquisition offer.
Here in Israel, exactly fifteen years ago, at a Tamir Fishman investor conference, a surprise cancellation announcement was received from cellular chipset company DSP Communications, controlled by entrepreneur Davidi Gilo, and indeed not long afterwards it turned out that the cancellation was because of a generous cash offer of $1.6 billion that the company had received from Intel (INTC). Incidentally, seven years later, Intel sold DSP to Marvell (MRVL) for $600 million.
Interestingly, this time too the most widespread rumor is that it is Intel that wants to buy EZchip, and thereby return to the network processors niche it abandoned almost entirely a few years ago. Such a move would be very logical, the experts maintain, since only a month ago Intel bought from Avago (AVGO) a network processors division that was part of LSI Corporation, which was sold to Avago last May.
Spokespersons on behalf of EZchip explained that, because of business events, the presence of CEO Eli Fruchter and CFO Dror Israel, each of whom was due to present at a different conference, was required in Israel. If an acquisition offer had in fact been made to the EZchip board, the company could just have sent the CFO, who is not a board member, to the conferences in question, and so have avoided an unnecessary uproar.
In my view, the cancellation is indeed connected to an acquisition deal, but another one, the one in which EZchip is on the buyer side, that is, of semiconductor company Tilera, a deal it announced two months ago and that has not yet closed. Anyone who reads the full acquisition agreement as reported to the SEC will realize that the closing will take place this month here in Israel, and that both sides have a great deal of work to do beforehand.
For example, from the agreement that was published I learn that, by the closing, the parties have to cancel the options held by Tilera employees and to replace them with options on EZchip stock for each of the dozens of new employees, and that seems to me good enough reason to keep the CEO and CFO in Israel if the sides want a quick closing, which in my opinion they do.
A very rapid closing of the Tilera acquisition is highly important to EZchip in the short term, for reasons that I will shortly explain, and this is beyond the great long-term potential, chiefly in the six-fold growth to $2.2 billion in the target market that EZchip's managers spoke about at length in the analysts' call when the acquisition was announced on July 1.
EZchip is in the final stages of developing its new family of processors, the NPS, which it has been working on in the past few years at the new center it opened in Kiryat Gat. The NPS processors are meant to be EZchip's entrée within a year or two into the large market of advanced network processors for data storage centers and cloud computing.
The earlier that EZchip reaches the market with its NPS processors, the broader will be the range of potential customers, such as Internet giants Facebook (FB) and Google (GOOG), Microsoft, and others. These customers will relieve the stock of the "separation anxiety" that has lain upon it in the past year, that is, the fear arising from its high dependence on a few customers like Cisco and China's ZTE, and in a very small niche of high-speed routers for telecommunications providers.
EZchip announced that, in the transition from the NPU to the NPS processors, it was parting from Marvell, via which it had made its sales to Cisco, but was also parting from the technological infrastructure that Marvell provided it at the interface between chip development and final production at Taiwanese giant TSMC. Today, EZchip has enough resources and know-how to build an alternative infrastructure for itself in Israel, but in my view the company it is acquiring, Tilera, has the appropriate infrastructure for stepping into Marvell's shoes, and the faster they close the deal, the more they will shorten NPS's time to market.
Once the Tilera deal is closed, EZchip will be an entirely different company. Besides having a target market that will grow to $2.2 billion, it will make a jump to annual sales of over $135 million next year, and its earnings per share, which I estimate will be around $1.70, will approach those of the semiconductor company that will be one of its competitors, Cavium (CAVM), and if EZchip is awarded a similar p/e ratio, it will be traded at double its current price.
The writer is an investor and investment consultant.
Published by Globes [online], Israel business news - www.globes-online.com - on September 9, 2014
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