By Chirag Gupta (New York University)
Overview of the deal
Acquirer: NVIDIA Corporation
Target: Mellanox Technologies
Estimated Value: $6.9 Bn
Announcement date: 11 March 2019
Acquirer Advisors: Goldman Sachs & Co. LLC, Jones Day
Target Advisors: Credit Suisse Group, J.P. Morgan Chase & Co., Latham & Watkins, LLP, and Herzog Fox & Neeman
Mellanox Technologies was a target acquisition for both NVIDIA and Intel. The acquisition will unite two of the world’s leading companies in high-performance computing (HPC). Together, NVIDIA’s computing platform and Mellanox’s solutions power over 250 of the world’s top 500 supercomputers and have every major cloud service provider and computer maker as customers. NVIDIA hopes to integrate the technology to expand on its current healthcare, AI, scientific computing, and data analytics operations and will acquire all of the issued and outstanding common shares of Mellanox for $125 per share in cash.
“Combining our two companies comes as a natural extension of our longstanding partnership and is a great fit given our common performance-driven cultures. This combination will foster the creation of powerful technology and fantastic opportunities for our people.”
Eyal Waldman, founder and CEO of Mellanox
The deal makes NVIDIA extremely competent in the landscape dominated by Intel and Qualcomm. The deal is expected to strengthen NVIDIA revenue stream stemming from data centers and be immediately accretive to NVIDIA’s non-GAAP gross margin, non-GAAP earnings per share and free cash flow. Notably, it took NVIDIA over a year to close the deal, highlighting the negative impact of the US-China trade tensions.
Company details (NVIDIA Corporation)
NVIDIA Corporation is a global visual computing company operating with Graphics Processing Units (GPUs) and Tegra Mobile Processors. They design chips and processors for data center driven cloud gaming, professional visualization, and artificial intelligence (AI) (self-driving vehicles, medical instruments, robotics).
Founded in 1993 Headquartered in Santa Clara, California
President and CEO: Mr. Jen-Hsun Huang
Number of employees: 13,775
Market Cap: $215.87 Bn
EV: $ 207.10 Bn
LTM Revenue: $11.78 Bn
LTM EBITDA: $3.86 Bn
LTM EV/Revenue: 17.6x
LTM EV/EBITDA: 52.0x
Company details (Mellanox Technologies, Ltd)
Mellanox Technologies, Ltd. is a semiconductor company that designs products and solutions that facilitate data transmission between servers, storage systems, communications infrastructure equipment, and other embedded systems.
Founded in 1999 Headquartered in Sunnyvale, California
President and CEO: Eyal Waldman
Number of employees: 2,719
Market Cap: $7.02 Bn
EV: $6.09 Bn
LTM Revenue: $1.45 Bn
LTM EBITDA: $375.9 Mn
LTM EV/Revenue: 4.2x
LTM EV/EBITDA: 16.2x
Projections and assumptions
NVIDIA is expected to experience an initial surge in expenses like interest and restructuring costs to effectively integrate Mellanox’s geographic domains, services, and management into NVIDIA’s structure. For the first quarter FY2021, NVIDIA turned $3.08 billion of revenue into an adjusted per-share profit of $1.80. The top line was up 39% year over year, and adjusted earnings more than doubled from $0.88 per share in the prior-year quarter.
NVIDIA recorded $1.14 billion in data center technology sales, which were at $634 million a year earlier. With Mellanox’s technology, NVIDIA announced projects like EGX A100 and aims to carry out real-time processing and protection of the massive amounts of streaming data from edge sensors. Mellanox brings real-time AI to manufacturing, retail, telecommunications, healthcare.
NVIDIA’s accelerated innovation is leading the automation of healthcare devices to tackle Covid-19. The accelerated sequencing was accomplished using a combination of NVIDIA’s Parabricks computational genomics software and its new A100 GPUs. DNA and RNA sequencing analysis time reduced significantly through GPU-accelerated sequencing, giving researchers quick medical insights for patients. “Researchers and scientists applying NVIDIA accelerated computing to save lives is the perfect example of our company’s purpose — we build computers to solve problems normal computers cannot,” Huang said, focusing on how data centers are changing and how NVIDIA and Mellanox can together drive those changes in various industries.
Table: NVIDIA Financial Analysis
Table: Mellanox Financial Analysis
NVIDIA targeted the fast-growing GPU segment of computing in their deal. Market capitalization will increase as the merger gives NVIDIA control over half of the worlds’ supercomputers. The expansion of NVIDIA’s operations results in the data-center market shift of NVIDIA from “chip-level co” to “data center-scale co. .”
NVIDIA gains the ability to move into hyperscale data centers run by large, public cloud providers like Amazon to further improve data automation and exchange services. In the long run, NVIDIA will lower its operating costs and the combined expertise of the companies will provide cutting-edge tech products and solutions to stakeholders.
The merger of the leading AI computing and high-speed networkers and data processors into one company will also be beneficial to long term shareholders. GPUs help accelerate specialized computing processes, but computational speed goes to waste if the networks the GPUs run on are slow. Mellanox's high-speed networking gear solves that problem. NVIDIA will be able to integrate circuit lines in their services and speed up the flow of info to and from data centers for NVIDIA and focus on high-performance computing.
NVIDIA created Bluefield 2 after acquiring Mellanox, growing in CPU, GPU, and DPU areas. NVIDIA’s ability to further its research and development through greater utilization of computing resources will result in diversified, stable, and high revenue growth for the company. The acquisition of Mellanox puts NVIDIA in a stronger position to compete against Intel and AMD, which are actively competing to enter the GPU market.
Risks and uncertainties
NVIDIA finalized the deal amidst the ongoing trade war between economic powerhouses US and China. Recently, numerous deals between American and international companies, particularly Chinese, have been impeded by Chinese authorities. China’s approval was necessary as both firms generate significant revenues from China (biggest market for semiconductors). Due to COVID, future trades through China can be severely restricted, causing a significant drop in NVIDIA’s bottom line.
NVIDIA wants to boost its data center and AI business with Mellanox to compete with Intel, but it is difficult to combine the technology, products, operations, and workforce of Mellanox. If NVIDIA is unable to properly integrate Mellanox in its business model, NVIDIA is susceptible to selling pressures and divesting its resources. The $7 Billion acquisition and the issuance of $5.00 billion notes in March 2020 adds to NVIDIAs pre-existing obligations of $1 billion notes and requires the company to work even harder to meet expenses.
NVIDIA did not repurchase any shares during the first quarter of fiscal year 2021 due to current market uncertainties. However, they remain committed to paying quarterly dividends ($98 million in quarterly cash dividends) and are now evaluating the timing of repurchasing shares. NVIDIA’s indebtedness may limit cash flow or ability to borrow additional funds for working capital, capital expenditures, acquisitions, and general corporate purposes. With growing competition from Intel and AMD, NVIDIA will have to readjust prices to survive and convince enterprise-level customers that GPUs are a better fit for data centers than CPUs.
“We’re combining the leaders of AI computing and high speed networking and data processing into one company and, so, this is really quite extraordinary,”
CEO Jensen Huang