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November 29, 2010
Voltaire shareholders got an early Christmas present this week. Mellanox Technologies has entered a definite agreement to acquire Voltaire Ltd. for a cash value of $8.75 per share, equivalent to approximately $218 million. The deal would represent the first major consolidation of InfiniBand vendors.
Over the past 12 months, the two public companies have generated combined sales of $217 million, of which approximately 70 percent comes from Mellanox. According to Mellanox CEO Eyal Waldman, the plan is to maintain that revenue stream and leverage the strength of the two companies to turbo-charge the business. During an investor conference call on Monday morning, Waldman repeatedly characterized the acquisition as one that was synergistic and would expand the reach of both companies' product portfolios. "We believe bringing Voltaire into the Mellanox family is all about accelerating our growth in the marketplace and furthering the breadth and depth of our end-to-end connectivity products for both InfiniBand and Ethernet," said Waldman. "The demand for more computing power, fast access to storage, efficiency and scalability is accelerating in HPC, enterprise, cloud computing, Internet, and Web 2.0 markets."
While Voltaire has relied on Mellanox network ASICs for its InfiniBand switch and HCA products, under the merged business the company will be able to offer complete vertically-integrated products in-house. Specifically, Mellanox's strength in network silicon and HCAs is balanced by Voltaire's dominance in network switches as well as fabric management and application acceleration software.
In the Ethernet space, Voltaire offers 10GbE switches, while Mellanox produces 10GbE NIC endpoints. "Together we have an end-to-end solution, which until now neither company had," said Waldman. Voltaire also brings its commercial HPC customer base to the table, including its clients in the financial sector (especially in high frequency trading) and the oil & gas exploration market.
Assuming no regulatory glitches, the deal is expected to close in the first quarter of 2011. According to Waldman, the new entity will retain the employees (numbering around 700) and operating sites of the two companies in both the US and Israel. At least that's the immediate plan.
Going forward, the addition of Voltaire is estimated to contribute between $0.02 and $0.05 per share in 2011 on a non-GAAP basis -- that's according to Mellanox CFO Michael Gray. By the end of 2012, they expect to realize cost synergies of at least $10 million per year. Since the cost of goods (COG) savings only accounts for about 20 percent of that, with the remainder being operating expenses, it's likely that there will be some consolidation of personnel and/or sites down the road, although no specific plans have been laid out.
As far as the product roadmap, Waldman said they will work toward integrating the product line "sometime during the second half of 2011." This applies to both their InfiniBand and Ethernet portfolios. Since InfiniBand FDR and EDR products are on the roadmap in 2011 and 2012, respectively, one can assume that these products will be among the first to be offered under the merged R&D teams.
No doubt some of the motivation behind the acquisition was the growing competition from QLogic, who is expanding into the InfiniBand market at the expense of both Mellanox and Voltaire. And as pointed out by Frank Berry, CEO and senior analyst at IT Brand Pulse, Mellanox was simultaneously selling to and competing with Voltaire, which was working against both interests. "Until now Mellanox was straddling the fence," he told HPCwire. "They were supplying the dominant switch supplier, Voltaire, with chips, but strangling them at the same time, as they marketed their own switch line. It appears they came to the realization they need Voltaire's software, sales and marketing to ensure they dominate the InfiniBand switch segment just as they dominate the InfiniBand LOM and HCA segment."
What Voltaire gets out this is survival. Although company revenues have steadily increased from 2005 to 2008 (with a slight dip during the 2009 recession), Voltaire has recorded net losses over the past five years. Because they cater to a somewhat specialized clientele and had to source chips from Mellanox, operating expenses and product costs have outpaced sales. Essentially, Voltaire was getting squeezed between supplier and part-time competitor Mellanox and full-time competitor QLogic.
Apparently OEMs and customers were behind this deal as well. Waldman said Mellanox consulted with system vendors as well as some key customers, and both groups bestowed their blessing on the transaction. For vendors and end users, the merger makes sense, given that it will be easier to buy network products from one entity rather than two. And if they're looking for an alternative, there's always QLogic for InfiniBand, and a host of providers for 10GbE.
"I actually don't think we're going to lose any business here," said Waldman. "We're going to gain business because it will be much easier to get an end-to-end solution."
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