Israel's Mellanox to buy EZchip for $811 million

TEL AVIV (Reuters) - Israeli chip designer Mellanox Technologies Ltd has agreed to acquire network communications chip maker EZchip Semiconductor Ltd for $811 million as it expands its product portfolio for high-performance computing.

The offer price of $25.50 per share represents a premium of 16 percent to EZchip’s closing price on Tuesday.

Mellanox said the acquisition pursues its strategy to become the leading global supplier of interconnect solutions for software-defined data centres.

Mellanox, with a market value of $1.85 billion, makes InfiniBand products that enable databases, servers and computers to communicate. By buying EZchip, also based in Israel, the company adds Ethernet network processors to the list.

Mellanox Chief Executive Eyal Waldman said the addition of EZchip will increase his company’s total addressable market by $2.2 billion in 2017 to $14.5 billion and enable it to more effectively take advantage of the massive data centre opportunity.

“The new and emerging Web 2.0 and cloud applications that influence our day-to-day lives depend on fast data movement and processing,” Waldman said.

“EZchip’s processing solutions allow users to process and analyse ... data both within and outside the data centre.”

Mellanox has very little overlap with EZChip’s customers, which could be an opportunity for the combined company over the next few years, Nomura analyst Sanjay Chaurasia said in a research note.

“We do not think that this acquisition is a defensive move. We believe that Mellanox could continue to grow in its core markets,” said Chaurasia, who maintained a “Buy” rating on Mellanox.

Waldman said EZchip customers that Mellanox “can grow into” include China’s Huawei and ZTE, as well as Ericsson and Avaya.

The deal, which has been approved by the boards of both companies, is expected to close in the first quarter of 2016 and be immediately accretive to adjusted earnings. The combined businesses have 2,400 employees, and revenue of $668 million for the year ended June 30, 2015.

EZchip shares jumped 14.4 percent to $25.16 while Mellanox was down 6.1 percent to $37.35 on Nasdaq.

EZchip’s shares had been halted for trade in Tel Aviv all day pending what it said would be a significant announcement. This followed a report in Israel’s Calcalist newspaper that Mellanox was in talks to buy EZchip.

Mellanox will fund the transaction with cash on hand and $300 million in fully committed debt financing.

Additional reporting by Anannya Pramanick in Bengaluru; Editing by Greg Mahlich and Susan Fenton