Nvidia's purchase of Mellanox shows M & A is alive and well in semiconductors

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Wall Street analysts approve
Nvidia

(NVDA) to buy
Mellanox Technologies

(MLNX) can only mean one thing: mergers and acquisitions in the semiconductor industry are doing well.

It's not just that Wall Street analysts approve the acquisition, although they do. Raymond James analyst Chris Caso think that this agreement will increase by 36 cents the profits of Nvidia. SunTrust analyst William Stein think that "the increase" will be 40 to 50 cents, or 6 to 8% of Nvidia's estimated profit for the 2019 calendar. Based on these figures, the market seems effective today. Nvidia shares closed up 7% to just over $ 161 per share.

Analysts believe the deal is strategic because it improves Nvidia's competitive position in the growing cloud computing market. (Mellanox creates technologies that connect computers in a data center.) But this agreement would have made sense for other companies as well. If it is probably folly to draw up a list of small-cap semiconductor companies in the hope of carrying out more operations, investors should consult other companies that have expressed their interest for Mellanox, including:
Microchip technology

(MCHP)
Xilinx

(XLNX) and
Marvell Technology

(MRVL).

A Marvell connection is not hard to find. The acquisition of Mellanox caps a significant gain for the Starboard Value activist hedge fund. It took an initial position at the end of 2017 when Mellanox stock was worth about $ 47 a share. Peter Feld, a Starboard executive, was a director at Marvell and Marvell bought Cavium in 2018. Cavium also manufactures products for cloud data centers.

This agreement could push Marvell to act or could cause others to consider Marvell. Shares are trading about 20 times the estimated earnings for 2019 and have risen by 3.8% today, outperforming
Nasdaq Composite
up 150 points, or 2%, Monday.

Microchip also has a Mellanox connection – its general manager, Steve Sanghi, sits on the Mellanox board of directors. Microchip shares are trading at 13x estimated earnings for 2019, a discount from this transaction. With a market value of $ 21 billion, it is not clear if Microchip is a predator or prey.

SunTrust's Stein emphasized in a note to customers that Xilinx and Mellanox are working together on Mellanox's Innova-2 product. He added that Xilinx management said it was more focused on mergers and acquisitions as an engine of growth. Xilinx could be disappointed to have missed this opportunity.

Overall, Marvell, Xilinx and Microchip are in the middle of the group in terms of semiconductor size. But the size of this sector is not evenly distributed.

The top five North American semiconductor companies are
Intel

(INTC),
Broadcom

(AVGO)
Texas Instruments

(TI), Nvidia and
Qualcomm

(QCOM). The combined market capitalization of this quintet is close to $ 600 billion, about twice as large as the roughly 75 other semiconductor companies traded on US stock exchanges.

The largest companies were also interested in Mellanox. New Street Research analyst Pierre Ferragu believes
Intel

(INTC) bet for Mellanox. "Intel's sticking to its $ 5.6 billion initial offer reflects a financial discipline to which we were not used to at Intel. A very promising development, "said Ferragu Barron's. He evaluates Intel Buy shares with a target price of $ 70.

In fact, one analyst claims that Nvidia reached the deal when Intel could not. "The deal on Nvidia is defensive because Intel was one of the interested parties," says Raymond James's Caso. "Nvidia uses an interconnect called Infiniband, which Mellanox pioneered, Intel is the only other company that can provide it." Intel has also announced today the creation of a new open source interconnect technology: Compute Express. "It is no coincidence that Intel has published the contract of Mellanox today," speculates Caso.

All activities are very dramatic and support the idea that mergers and acquisitions are likely to increase. "The semiconductor industry has been consolidating for some time," said Caso. "It's still part of the story."

After a difficult year for semiconductors in 2018, technology management teams seem to appreciate the values ​​they see on the market today. Part of this is already reflected in stock prices. the
Philadelphia Semiconductor Index
(SOX) is up almost 17% since the beginning of the year. Nevertheless, it is down 8% from its 52-week high and more mergers and acquisitions could help the sector to reach new heights.

Write to Al Root at [email protected]