Comms chips

With No New Suitors, EZchip Is Mellanox's

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

inkstainedwretch 1/19/2016 | 3:45:39 PM
Post-hullabaloo update 1/19/2016 ...Aaaand it looks like a done deal. Mellanox shareholders just approved the merger. Below is part of the statement from Mellanox. -- Brian Santo

"Following completion of the transaction, Mellanox intends to integrate employees from both organizations and retain both companies' existing product lines, which will ensure continuity for customers and partners of both companies."
[email protected] 1/7/2016 | 3:48:38 PM
Re: Mellanox - EZChip update January 7 2016 As long as Mellanox still wants to close the deal after all the hullabaloo....
inkstainedwretch 1/7/2016 | 12:52:49 PM
Mellanox - EZChip update January 7 2016 Raging Capital finally acknowledged the inevitable. Its statement is below.

-- Brian Santo

Raging Capital Management, LLC , the largest shareholder of EZchip Ltd. (NASDAQ: EZCH) owning approximately 8.0% of the ordinary shares outstanding, announced today that it supports EZchip's proposed merger with Mellanox Technologies, Ltd. (NASDAQ: MLNX) ("Mellanox") which is scheduled for a shareholder vote at the Extraordinary General Meeting on January 19, 2016. 

As Raging Capital has articulated previously, we believe EZchip has leading edge technology, and is well-positioned to capitalize on the emerging trends of SDN/NFV and white box networking and we believe EZchip is worth more than $25.50 per share.  Through our efforts, EZchip and Mellanox agreed to amend their merger agreement to provide for a Go Shop process, but no superior offer emerged from that process.

Consequently, under the current circumstances, we believe the best available option for EZchip's shareholders is to accept the transaction with Mellanox. 
inkstainedwretch 12/21/2015 | 12:41:40 PM
Update Dec 21 EZChip is encouraging its shareholders to approve the merger with Mellanox. According to the company:

·         The Mellanox transaction is the best available outcome for EZchip shareholders, delivering an immediate full cash premium to EZchip shareholders;

·         The value EZchip shareholders are being offered is far superior to EZchip's standalone prospects, given the risks and challenges the Company faces, even when taking into account the potential of EZchip's NPS-400 and Tile-MX product lines;

·         The Mellanox transaction is in the best interests of all shareholders, as evidenced by the support of five industry analysts and the leading U.S. and Israeli independent proxy advisory firms.
[email protected] 12/17/2015 | 5:56:01 AM
Solid foundations at EZchip The market has certainly moved on and that's why EZchip has been changing direction in the past year or more. It has well regarded tech and expertise and that is what Mellanox will be getting.

This great analysis once again points out the perils of being a listed company with a shareholer bae that can include 'activist' investors...
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