Nvidia's headquarters in Santa Clara, California. Picture: JUSTIN SULLIVAN/GETTY IMAGES /AFP
Nvidia's headquarters in Santa Clara, California. Picture: JUSTIN SULLIVAN/GETTY IMAGES /AFP
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Tel Aviv —  US chipmaker Nvidia  will buy Israeli chip designer Mellanox Technologies for $6.8bn, beating rival Intel  in a deal that would help the firm boost its data centre and supercomputer business.

The all-cash offer of $125 per share represents a premium of 14% to Mellanox's closing price on Friday. Mellanox shares rose 8.4% to $118.56 and Nvidia shares gained 2.8% in early Nasdaq trading on Monday.

The agreement, which the companies described as "definitive", follows a competitive bidding process which according to sources familiar with the matter, included rival chipmakers such as Intel.

Xilinx was also part of the process, sources said. Mellanox will pay a $350m termination fee to Nvidia if it accepts a rival offer. 

Intel declined to comment on whether the company had bid for Mellanox, while Xilinx did not immediately respond to a request for comment.

"The emergence of AI (artificial intelligence) and data science, as well as billions of simultaneous computer users, is fuelling sky-rocketing demand on the world’s data centres," said Nvidia CE Jensen Hung.

Bernstein analyst Stacy Rasgon said Nvidia has been pushing more into networking and connectivity with its own tailored solutions and Mellanox would bring further expertise.

"But going out and buying an asset right now, immediately after the recent spate of guide downs may raise a few eyebrows," Rasgon said.  "It will probably spark questions as to whether Nvidia sees anything changing regarding the growth trajectory of their core data centre business."

Timing

Nvidia management comments on a conference call that discussions to buy Mellanox were relatively recent suggested that they may have calculated that Mellanox as part of Intel would have hindered Nvidia’s long-term growth, Rosenblatt Securities analyst Hans Mosesmann said.

Mellanox makes chips and other hardware for data centre servers that power cloud computing. The company had a market capitalisation of about $5.9bn at the end of trading on Friday.

Nvidia cut its fourth-quarter revenue estimate by half a billion dollars in January because of weak demand for its gaming chips in China and lower-than-expected data centre sales.

"We're not changing our guidance that we just provided about a month ago for the current fiscal year," Nvidia CFO Colette Kress told the conference call.

Data centre revenue accounts for nearly a third of Nvidia's sales. The chipmaker has grown at a rapid pace in the past few years under Huang, but a slowdown in China and a fading cryptocurrency craze have started to weigh on its sales in recent quarters.

It is expected to close by the end of 2019. It could, however, face some regulatory hurdles in China, where Mellanox has major customers such as Alibaba and Baidu.

In the wake of its trade row with the US, China has previously moved to thwart non-Chinese chip M&A deals.

Analysts believe Intel would have faced even greater challenges as it and Mellanox were dominant suppliers of InfiniBand technology, a networking standard commonly used in supercomputers.

The agreement is a win for New York-based activist investor Starboard Value, which owns 5.8% of Mellanox and reached a deal with it in 2018 over the composition of its board.

Reuters