Starboard seeks to replace all of Mellanox directors in bid for control
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Starboard seeks to replace all of Mellanox directors in bid for control

US activist investor says in letter to shareholders that current board is unable to create value; lists candidates who 'provide the expertise needed'

Mellanox headquarters in Yokne'am (Moshe Shai/Flash90)
Mellanox headquarters in Yokne'am (Moshe Shai/Flash90)

Starboard Value LP, the largest shareholder in Israel’s Mellanox Technologies Ltd., has started a proxy fight for control of the Israeli maker of servers and storage switching solutions, saying it seeks to replace all of the Mellanox board members with nine new “highly qualified candidates.”

In a letter sent to Mellanox shareholders on Wednesday, activist investor Starboard said it would be putting its candidates up for election at the company’s 2018 annual meeting of shareholders. A proxy fight is a struggle between two factions of a corporation for the proxy votes from shareholders needed to control a corporation. The date of the annual meeting has not yet been published.

Earlier this month, the US investor, which in November acquired a 10.7 percent stake in Mellanox, called for “substantial change” at the company, which it said was underperforming peers due to “weak execution” and “excessive spending.”

In the letter to Mellanox shareholders released on Wednesday, Starboard said that its interests were aligned with those of other shareholders, and the aim of its activism at the company is to “help drive significant value creation” after “years of substantial underperformance.”

Mellanox CEO Eyal Waldman in his office in Tel Aviv (Shoshanna Solomon/TimesofIsrael)

Starboard is a New York-based investment adviser that invests in publicly traded US companies in a bid to turn around their fortunes.

Mellanox was founded by entrepreneur Eyal Waldman, in 1999 in Yokne’am, Israel, with the purpose of developing semiconductors for data center infrastructure based on the next generation input output (NGIO) standard. The company is headquartered in Sunnyvale, California, and in Yokne’am and listed shares on Nasdaq in 2007. It has a market value of $3.3 billion.

“The board’s primary responsibility to shareholders is to set the company’s strategy, to select a management team, to oversee management in operating the company’s business, and, in particular, to hold management accountable for any failures in executing on that strategy or achieving appropriate levels of performance,” Starboard said in its letter to Mellanox shareholders.

“Unfortunately,” the investor continued, “Mellanox has been plagued by years of dismal stock price and operating performance, poor execution, excessive stock-based compensation, and a perceived inability to hold management accountable for its failure to deliver results. Mellanox’s targets for operating performance have been set far below acceptable expectations, and the company has not shown any ability to meet even its own underwhelming targets.”

Starboard also said the Mellanox board has “not taken sufficient steps to hold management accountable or to create value for shareholders.”

In the letter, Starboard presents shareholders with the names of its candidates for the board, saying they are a “slate of directors who have a diverse set of skills and backgrounds that, in aggregate, provide the expertise needed at Mellanox,” coming from backgrounds in the semiconductor, technology, networking, and high-performance computing industries.

Mellanox ConnectX IB Adapter Card (Single-Port) (Photo credit: Courtesy)
Mellanox ConnectX IB Adapter Card (Single-Port) (Photo credit: Courtesy)

“We believe that this level of experience is necessary and crucial for restoring credibility and accountability at Mellanox, while helping to develop a strong strategic plan aimed at unlocking the full potential of the company’s enviable technology leadership position and delivering substantial shareholder value,” Starboard wrote in its letter.

In a statement on Thursday, Mellanox confirmed receipt of Starboard’s list of nine director candidates, and backed its current board. The company was not informed in advance about the Starboard candidates, whom they heard about only via the media, Mellanox said, despite several discussions held with Starboard officials in recent months.

“The Mellanox Board is comprised of nine highly qualified and experienced directors, all of whom are committed to creating value for Mellanox shareholders,” the statement said. “Mellanox’s board of directors is confident in the company’s strategy to accelerate growth, transform our business and enhance shareholder value.”

In December, Mellanox forecast low- to mid-teens revenue growth for fiscal 2018, which Starboard said was an insufficient target. Mellanox is scheduled to report its fourth quarter results later on Thursday.

“The appointment of directors to a board is the most important way to affect a company’s actions, because it could also lead to the new board ousting the current CEO,” said Shirin Herzog, a senior partner and head of mergers and acquisitions at the Israeli law firm Ron Gazit, Rotenberg & Co.

Herzog represented activist investor Benny Landa in the most notable proxy fight to date in Israel, against Teva in 2014.

“The right to appoint the majority of a board in Israel is deemed an instrument of control of the company,” she said. “However, any shareholder holding 1 percent or more of company shares may suggest names of candidates for the board. This in itself is not an instrument of control, because the majority of shareholders will still need to vote for them.”

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