Monday, November 29, 2010

Focus, not Cost "Synergies", Key to Mellanox-Voltaire Merger Success

By David Gross

InfiniBand IC supplier Mellanox announced today that it acquiring long-time customer, and fellow Israeli InfiniBand technology developer Voltaire.   The acquisition price of $8.75 a share represents a more than 35% premium over Friday's close of $6.43, and is net of $42 million of cash held by Voltaire.   Mellanox is financing the deal entirely out of its cash balance of $240 million.

Mellanox is down 4% on the news to $24 a share, while Voltaire is up 34% to $8.65, leaving very limited room for risk arbitrage on the deal.

While both companies have gotten into the Ethernet market over the last two years, the deal only makes sense in the context of InfiniBand, which as a niche technology, does not offer a chip supplier billions of ports over which to amortize development costs.   Mellanox already offers both ICs and adapter cards.   Moreover, and very importantly, InfiniBand switches are low cost, low memory, high performance boxes with stripped down operating systems and forwarding tables.   The intellectual property router and Ethernet switch makers put into system design and network O/S is less valuable here as a result.    The message acceleration software and management tools associated with InfiniBand devices require far less R&D than new ASICs or network operating systems for high-end, modular Ethernet switches.

What's likely to happen here is Wall Street will do its usual fretting over whether the proposed operating cost reductions will be achieved, which in this case are $10 million, whether the price is reasonable, and what customers will think.  Additionally, at least 30 hedge fund managers are likely to ask the same questions on the strategic impact of owning switches, InfiniBand vs. Ethernet, and will seek "more color" on how the integration is going.    But none of this will really matter.   The key to success here will be the extent to which the new company focuses on InfiniBand.    Outside of bridging products and maybe 40G NICs, there new company needs to stay out of the Ethernet market, which already has enough suppliers, and treat Fibre Channel-over-Ethernet as the toxic technology it already has proven to be for Brocade.

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