US activist investor buys stake in bid to shake up Israel’s Mellanox

Starboard calling on the tech firm to cut costs, explore potential sale, The Wall Street Journal reports

Shoshanna Solomon was The Times of Israel's Startups and Business reporter

Eyal Waldman, president and CEO of Mellanox Technologies Ltd. (YouTube)
Eyal Waldman, president and CEO of Mellanox Technologies Ltd. (YouTube)

New York activist investor Starboard Value LP has acquired a 10.7 percent stake in Israel’s Mellanox Technologies Ltd., an Israeli maker of servers and storage switching solutions, The Wall Street Journal reported on Tuesday.

The Wall Street Journal said the investor is urging Mellanox to “improve its margins and stock and explore a potential sale,” citing people familiar with the matter. The acquisition could be an opening shot in a takeover bid, Israeli website Calcalist speculated Tuesday, valuing the deal at some $250 million.

Starboard is a New York-based investment adviser that invests in publicly traded US companies. “Starboard invests in deeply undervalued companies and actively engages with management teams and boards of directors to identify and execute on opportunities to unlock value for the benefit of all shareholders,” its website said.

In a filing to the US Securities and Exchange Commission, Starboard said it had bought a 9.8% stake of shares Mellanox in the open market, with options that increase its holdings to 10.7%, with the belief that the shares, when acquired, were undervalued and represented an “attractive investment opportunity.”

“Depending upon overall market conditions,” Starboard may increase or decrease its holdings in the company, which the US investor “has been following for years.” The investor said it has been noting the “growing disparity between the issuer’s margins, growth and stock price performance compared to its peer group.”

“Tremendous value can be created through operational improvements or other strategic alternatives,” the investor said.

Peter Feld, a principal of Starboard, is a director of Marvell Technology Group Ltd., which is a competitor, in certain lines, to Mellanox. In part, the filing said, Marvell “has expressed an interest in discussing” with Mellanox “a potential strategic transaction on a negotiated friendly basis,” but Mellanox has “declined to enter into any such discussions.”

Starboard said “there are no current discussions regarding a strategic transaction” between Marvell and Starboard, and Feld, while continuing to serve as a director of Marvell, has agreed that he would recuse himself from participation in any discussions at Marvell regarding any potential interest in Mellanox, the filing said.

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 $2.6 billion.

In 2011 Mellanox bought Voltaire to expand its software and switch product offerings, and strengthen its leadership position in end-to-end connectivity systems. In 2016 it completed the acquisition of Israel’s EZchip, a maker of high-performance processing solutions for carrier and data center networks.

“We became aware of Starboard’s investment in Mellanox on November 20th. Mellanox maintains an open dialogue with all of our shareholders and we welcome their input and investment. In line with our commitment to drive enhanced shareholder value, the Mellanox Board of Directors and management team continually review our operational and strategic priorities and are committed to acting in the best interests of our shareholders,” Mellanox said in an emailed response.

“Starboard Value might be interested in making a strategic change in Mellanox,” said Dafna Yagur, head of Israel research at the London-based broker Makor Capital by phone. “Mellanox is trading at a lower valuation than peers, as organic growth is slowing and competition intensifies. With the consolidation happening in the semiconductor industry, the investor would probably be pushing towards a sale.”

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