EZchip Gains After Mellanox Merger Delayed Amid Proxy Fight

  • Mellanox re-affirmed offer to buy EZchip at $25.50 per share
  • Activist hedge fund pushing EZchip to seek higher buyout offer

EZchip Semiconductor Ltd., whose $811 million takeover by Mellanox Technologies Ltd. has been challenged by activist investors, rallied after the company said it would delay a vote on the deal to shop itself around to other potential buyers.

Mellanox, whose products power data-crunching supercomputers, reaffirmed its offer of $25.50 per share and sent a letter to EZchip requesting amendments to the merger agreement to allow EZchip a 30-day “go-shop” period, as well as a postponement of a vote on the deal scheduled for today. Shares of EZchip rose 2.6 percent to $24.55 at 12:38 p.m. in New York, the biggest gain in six weeks. Mellanox added 0.5 percent to $46.57.

Activist hedge fund Raging Capital Management, which owns 6.7 percent of EZchip, has nominated two dissident directors and urged shareholders to vote against the deal, arguing that Mellanox’s offer was a “low-ball price” and that EZchip failed to “run a fair and competitive sales process.”

Mellanox’s affirmation of its offer price spurred a rally in EZchip shares because it allayed concern that the deal would fall apart, said Steve Bierker, a trader and analyst at Muhlenkamp & Co. which manages about $450 million, including EZchip shares.

‘Limited Downside’

“You kind of get a free put option on the shares because Mellanox has reaffirmed their interest in the deal, while giving EZchip time to shop around,” Muhlenkamp said by phone from Pittsburgh. “There’s very limited downside in the deal, and potential upside.”

Mellanox Chief Executive Officer Eyal Waldman said last month that the merger was driven by the need for more innovation to develop a system-on-a-chip. Mellanox has been trying with its data-center switches to jump ahead of competitors such as Intel Corp. and Broadcom Corp., while EZchip, which makes processors for edge routers in cable and phone networks, has been battling to break out of a multi-year share-slump.

“This merger will enable us to bring the processing ability from EZchip and our networking capability to a system-on-a-chip device,” Waldman said in an interview last month. The technology will make the chip more “intelligent,” enabling it to have cyber security and storage capabilities, among other things, he said.

Biggest Customer

EZchip’s shares dropped 17 percent in the first half of the year, falling after its announcement in the second quarter that Cisco Systems Inc., its largest customer, was forgoing the company as a partner to develop processors in-house for its next generation routing platform. The risk of losing Cisco revenue in 2018 made EZchip a cheaper target for Mellanox, Benchmark Co LLC said at the time.

Yokneam, Israel-based EZchip reported adjusted net income of $11.5 million on Nov. 5, less than the $11.7 million average estimate of two analysts, according to data compiled by Bloomberg. EZchip forecast fourth-quarter revenue of $25 million, well below the $33.2 million analyst estimate, due to adjustments “across several key customers.”

Institutional Shareholder Services Inc., an influential adviser on corporate
governance, recommended shareholders vote in favor of the merger in an Oct. 31 report.

Board Vote

Proxy adviser Glass Lews & Co sided with Raging Capital in a Nov. 3 report, arguing that Mellanox’s offer failed to compensate shareholders for the potential of EZchip as a standalone company.

Raging Capital, run by Bill Martin, publicly objected on Oct. 14 to the Mellanox offer.

The “acquisition proposal not only undervalues the existing business and its future potential but Mellanox is also essentially getting” EZchip’s newly developed NPS-400 chip “for free,” Martin wrote in the letter. The merger “appears to be a marriage of convenience.”

Raging Capital also nominated Ken Traub and Paul McWilliams to replace two of EZchip’s seven-member board. Shareholders rejected that move in a vote today, electing all of EZchip’s board nominees.

Martin started Raging Capital in 2006 and manages about $650 million. He also co-founded the RagingBull.com financial website and fund-analytics service InsiderScore.

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