Starboard Acquires Stake in Mellanox -- WSJ
November 21 2017 - 2:02AM
Dow Jones News
By David Benoit
This article is being republished as part of our daily
reproduction of WSJ.com articles that also appeared in the U.S.
print edition of The Wall Street Journal (November 21, 2017).
Starboard Value LP has taken a 10.7% stake in Mellanox
Technologies Ltd., urging the company to improve its margins and
stock and explore a potential sale, a thesis in part helped by deal
talks at Marvell Technology Group Ltd., where Starboard has a
seat.
Starboard believes Mellanox is spending too much on research and
development and other corporate expenses to try to boost revenue,
sacrificing margins compared with peers, according to people
familiar with the matter. The activist wants the company to improve
its operations and potentially explore a deal to boost the stock,
it confirmed in a filing late Monday.
A Mellanox spokesman said the company only learned of
Starboard's investment Monday but welcomed the activist. "In line
with our commitment to drive enhanced shareholder value, the
Mellanox Board of Directors and management team continually review
our operational and strategic priorities and are committed to
acting in the best interests of our shareholders," he said.
Shares of Mellanox jumped 5.8% in after-hours trading after The
Wall Street Journal first reported Starboard's stake and
intentions.
The New York activist investor has a long record of successful
semiconductor investments, highlighted earlier Monday by Marvell's
$6 billion deal for Cavium Inc., less than two years after
Starboard arrived and the company promptly ousted its founders.
(See article on page B4.) The deal helped send Marvell's stock
higher, and it has now returned about 157% since before Starboard
arrived in February 2016, compared with roughly 127% for the
iShares Semiconductor exchange-traded fund.
Mellanox's stock has drastically underperformed the same ETF in
recent years. The Israel- and Sunnyvale, Calif.-based company has
returned about 12% in the past year but has lost 38% over the past
five years, both worse than the ETF's returns of 54% and nearly
300%, respectively.
Marvell recently approached Mellanox about a potential
transaction but was rebuffed, Starboard said in its filing, a
response that helped inform Starboard's belief that Mellanox was
hostile to potential deals, according to people familiar with the
matter. Starboard's Peter Feld is on the board of Marvell.
No discussions are continuing between the sides at this time,
and Mr. Feld has said he would recuse himself from anything that
could happen in the future, Starboard added.
Mellanox, with a $2.6 billion market value as of Monday's close,
specializes in technologies for high-speed computing and is a
leader in the InfiniBand systems that help power supercomputers, as
well as Ethernet products. Its high-powered products are used in
the giant data centers that make cloud-computing possible. Chief
Executive Eyal Waldman was a co-founder of the company in 1999.
Revenue since 2012 has soared, but it hasn't greatly helped the
bottom line. In 2016, Mellanox recorded $857.5 million in revenue,
up from $500.3 million in 2012, but spending on research and sales
and marketing combined rose to $456 million from just under $200
million.
Starboard has long played in the semiconductor space -- this is
the firm's 12th stake of above 5% in a chip-related company -- and
it has typically pushed for both margin improvement and deal
talks.
That was the case for Marvell, where the activist arrived as the
stock had slumped amid an accounting probe. Shortly afterward, the
Marvell founders were ousted and Starboard gained board seats that
gave the firm a role in selecting the next CEO. Monday's deal with
Cavium is aimed at expanding Marvell's reach and helping it compete
with bigger semiconductor firms.
Starboard is sitting on investment gains of more than $440
million from that investment, according to filings.
The semiconductor space has been rife with deals, including
Broadcom Ltd.'s unsolicited $105 billion attempt to buy Qualcomm
Inc., which itself is trying to close a $39 billion deal to buy NXP
Semiconductors NV. The deals come as technology companies try to
push connectivity and ever-growing information feeds into
everything from phones to cars, trends that rely on powerful,
chip-driven computing.
Analysts from Benchmark Capital initiated coverage on Mellanox
at the end of August, calling it a "ripe acquisition target for
many companies." Though it listed Marvell as the most "logical"
buyer, it also included other giant chip makers.
Write to David Benoit at david.benoit@wsj.com
(END) Dow Jones Newswires
November 21, 2017 02:47 ET (07:47 GMT)
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