Mellanox Seeks to Make System-on-Chip by 2018 After Merger

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Need for more innovation drove Mellanox Technologies Ltd.’s $811 million acquisition of EZchip Semiconductor Ltd., Eyal Waldman, Mellanox chief executive officer, said.

“We thought of doing system-on-a-chip some time ago but didn’t have enough organic resources to do the device,” Waldman said in an interview after a press conference in Tel Aviv on Thursday. “This merger will enable us to bring the processing ability from EZchip and our networking capability to a system-on-a-chip device.” The technology will make the chip more “intelligent” enabling it to have cyber security and storage capabilities, among other things, he said.

Mellanox has been trying with its data-center switches to jump ahead of rivals such as Intel Corp. and Broadcom, while EZchip, which makes processors for edge routers in cable and phone networks, has been battling to break out of a multiyear share-slump. The tie-up is the latest in a wave of consolidation in the $300 billion semiconductor industry, including Avago Technologies Ltd.’s $37 billion takeover by Broadcom, announced in May.

Competitors in the system-on-a-chip market may include Cavium Inc., Broadcom Corp, and Applied Micro Circuits Corp., Waldman said. Matching up Mellanox’s “superior networking functionality” with EZchip’s processing capabilities, will lead to “very attractive products,” he said. Both companies are headquartered in Yokneam, Israel.

Boost Earnings

Waldman expects to close the deal by early January and says the transaction will boost earnings immediately. “The big potential is in bringing intelligence into the network” with cyber security and storage capabilities, then producing “more intelligent networking cards and switches,” Waldman said.

Mellanox, which unveiled a new data-center switch in June that can move information at the fastest speed in the industry, will pay for the deal with cash and a $300 million term loan, according to a statement on Wednesday.

“While the deal could potentially create opportunities for Mellanox in the longer term, in the near term it could raise operational risks due to increasing financial leverage, product integration challenges and reduced management attention to the company’s core business,” Sergey Vastchenok, an analyst at Oppenheimer & Co. in Tel Aviv, said by e-mail.

EZchip shares jumped 11 percent to 98.19 shekels ($24.98) at the close in Tel Aviv, after adding 14 percent to $25.16 in New York trading on Wednesday. Mellanox fell 5 percent to $37.79.

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