In a notably self-humiliating report, EZchip today disclosed it has failed to find a merger partner more generous than Mellanox. EZchip Semiconductor can now proceed with being acquired by Mellanox.
Mellanox Technologies Ltd. (Nasdaq: MLNX) announced its intention to buy EZchip Technologies Ltd. (Nasdaq: EZCH) for $811 million in early October. EZchip's biggest single shareholder, Raging Capital, insisted that Mellanox was seriously undervaluing EZchip, and forced EZchip to look for another potential acquirer. (See Mellanox to Buy EZchip and Mellanox Gets the Jitters Over EZchip Acquisition.)
EZchip drew up a list of 31 other companies that might be a good match. One company from the list was interested enough to even sign a non-disclosure agreement to talk about a merger. No other companies expressed any interest in buying EZchip.
Raging Capital thought it was maximizing its investment. What it did instead was box EZchip into a situation where it had to explain why nobody else wants it.
The company's main product line is network processors (NPU). EZchip explained that over the last six years the market evaporated; none of the top four customers in the world are sourcing NPUs from third parties anymore. Alcatel-Lucent (NYSE: ALU) has always built its own network processors. Juniper Networks Inc. (NYSE: JNPR) was once EZchip's largest customer, but it decided to take network processor production in-house in 2009. Huawei Technologies Co. Ltd. followed suit in 2012. Earlier this year, Cisco Systems Inc. (Nasdaq: CSCO) -- which represented 35% of EZchip's revenue at the time -- also decided to make its own NPUs.
EZchip says it has only one place to go with its NPUs: white boxes.
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EZchip is confident its latest network processors (the NPS-400) are technologically superior to the competition. It said it has already won three white box and data center customers that it characterized as tier-1 accounts.
Forebodingly, however, the company noted that "it is not clear what revenue these design wins will translate to or when."
Furthermore, the company expects that succeeding in the white box market will be difficult, given that potential customers may opt for any of the cheaper and simpler solutions available.
EZchip has tried to diversify. Last year, EZchip bought multi-core specialist Tilera for $50 million, but today it acknowledged that building a multi-core business is going to be an uphill slog. The market is dominated by much larger companies (Avago/Broadcom, Intel/Altera, NXP/Freescale), and EZchip isn't going to have its next generation multi-core CPU in production until 2018, according to the company's presentation.
Despite all that, EZchip may still be a good investment for Mellanox, which from the beginning carefully explained that it wanted EZchip for its expertise in security, deep packet inspection, video and storage processing.
Raging Capital may have done Mellanox a favor, though, by opening the question: Is Mellanox offering too much for EZchip?
— Brian Santo, Senior Editor, Components, T&M, Light Reading