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Mellanox gobbles up Voltaire for $218m

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Mellanox Technologies will cough up $218m in cash to acquire networking rival Voltaire as it seeks to gain a larger footprint in data centre networks and a better chance to wring more profits out of the combined companies.

Voltaire is a maker of InfiniBand switches that has expanded out into 10 Gigabit Ethernet products in the past two years. It has carved itself a niche among high performance computing (HPC) clusters and among financial services companies that need high-bandwidth and low-latency networking.

For instance, on the latest Top 500 ranking of supercomputers announced two weeks ago, Voltaire's switches are in three of the top seven machines on the list, and its products are behind 25 per cent of the aggregate number-crunching performance of the Top 500 list, according to Asaf Somekh, vice president of marketing at Voltaire.

The company has been equally aggressive about pushing into trading systems used by hedge funds and other financial institutions, jumping on the Ethernet bandwagon and offering the dense and fast switches that these companies need in order to be able to co-locate their systems near the world's stock exchanges in some of the most expensive (and lucrative) real estate on the planet.

Under the acquisition deal, Mellanox, a maker of networking chips, switches, and host adapters, will pay $8.75 per share in cash to acquire Voltaire, which works out to $218m and $176m net of Voltaire's current cash pile. Both companies are publicly traded – Mellanox on the NASDAQ and Tel Aviv stock exchanges, Voltaire only on the NASDAQ – and the boards of both companies have unanimously approved the deal.

At the market close last Wednesday ahead of the Thanksgiving holiday in the United States, Voltaire's shares were trading at $6.43 a share, giving Voltaire a market capitalisation of $136.5m. Taking out the $42m cash pile, Voltaire was valued at around $94.5m by Wall Street, meaning that Mellanox is paying an 86 per cent premium to get control of one of its rivals.

That seems like a hefty premium to pay for a company that has not made a profit this year: Voltaire has had $67.7m in revenues in the trailing 12 months and has lost just under $4m over that time. But Voltaire has well-regarded products (especially its server and networking virtualisation and fabric management software for its switches) and has a chance to help Mellanox grow its business profitably; that is, if enough costs can be cut from the two companies and their engineering teams can be brought together without disrupting future products.

In a conference call with Wall Street to discuss the deal, Eyal Waldman, president, chairman and chief executive officer of Mellanox, said that the company would continue to drive both InfiniBand and Ethernet switching and adapter products and will maintain the current product lines from both companies. Obviously, looking ahead, Mellanox will be seeking to converge as many products as it can to cut costs.

Mellanox is a player in InfiniBand switching for servers and storage and makes its own chips to support the protocol, which Voltaire uses in its switches. Mellanox has a large share of high-end InfiniBand and Ethernet networking adapter card racket, and seems to be buying Voltaire to jump-start its entry into 10 Gigabit Ethernet and future 40 GE and 100 GE products and to peddle gateways that bridge InfiniBand and Ethernet networks. The move also gives Mellanox a chance to grab a bigger piece of the InfiniBand space to gird its loins for a battle with QLogic, which makes its own InfiniBand and Fibre Channel silicon and switches.

Mellanox said that the combined companies will have over 700 employees and had combined sales of $217m in the 12 months ended in September. The Mellanox portion of those sales for the prior 12 months is $149.5m, and the company brought $18.3m to the bottom line. Mellanox said that it believes that by the end of 2012, it will be able to eliminate around $10m in annualised costs from the combined companies, and added that in 2011 Voltaire would add somewhere between 2 and 5 cents per share to non-GAAP earnings. This means it is very likely that after merger costs, Voltaire won't add much to the Mellanox bottom line in 2011.

If you look at the combined companies' financials for 2009, then 42 per cent of the $166m in revenues for the new Mellanox came from adapter card sales, 28 per cent came from switches, 23 per cent came from integrated circuits, 4 per cent came from software and services, and 3 per cent came from "other". Some of that chip revenue will fall away in the future because Voltaire had previously been a Mellanox chip buyer, but some of the overhead will also go away, making the combination more profitable.

Mellanox expects the merger to close some time in the first quarter of 2011. Wall Street was obviously happy about Voltaire being acquired, and sent its stock rocketing upwards by 34.5 per cent to $8.65. Mellanox shares were trading down 4.4 per cent as we go to press, to $24.11, giving Mellanox a market capitalisation of $856.2m. ®

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