Starboard Value Takes 10.7% Stake in Mellanox Technologies -- Update

By David Benoit Features Dow Jones Newswires

Starboard Value LP has taken a 10.7% stake in Mellanox Technologies Ltd., urging the company to improve its margins and stock and explore a potential sale, a thesis in part helped by deal talks at Marvell Technology Group Ltd., where Starboard has a seat.

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Starboard believes Mellanox is spending too much on research and development and other corporate expenses to try to grow revenue, sacrificing margins compared with peers, according to people familiar with the matter. The activist wants the company to improve its operations and potentially explore a deal to boost the stock, the people said.

A spokeswoman for Mellanox wasn't immediately available for comment.

The New York activist investor has a long record of successful semiconductor investments, highlighted earlier Monday by Marvell's $6 billion deal for Cavium Inc., less than two years after Starboard arrived and the company promptly ousted its founders. The deal helped send Marvell stock higher, and it has now returned about 157% since before Starboard arrived in February 2016, compared with roughly 127% from the iShares Semiconductor exchange-traded fund.

Mellanox's stock has dramatically underperformed the same ETF in recent years. The Israel and Sunnyvale, Calif.,-based company has returned about 12% in the past year but has lost 38% over the past five years, both worse than the ETF's 54% and nearly 300% return.

Marvell recently approached Mellanox about a potential transaction but was rebuffed, a response that helped inform Starboard's belief that Mellanox was hostile to potential deals, according to people familiar with the matter. Starboard's Peter Feld is on the board of Marvell.

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No discussions are ongoing between the sides at this time, and Mr. Feld has said he would recuse himself from anything that could happen in the future, the people added.

Starboard Value LP has taken a 10.7% stake in Mellanox Technologies Ltd., urging the company to improve its margins and stock and explore a potential sale, a thesis in part helped by deal talks at Marvell Technology Group Ltd., where Starboard has a seat.

Starboard believes Mellanox is spending too much on research and development and other corporate expenses to try to grow revenue, sacrificing margins compared with peers, according to people familiar with the matter. The activist wants the company to improve its operations and potentially explore a deal to boost the stock, it confirmed in a filing late Monday.

A spokeswoman for Mellanox wasn't immediately available for comment.

Shares of the company jumped 5.8% in after-hours trading after the Journal first reported Starboard's stake and intentions.

The New York activist investor has a long record of successful semiconductor investments, highlighted earlier Monday by Marvell's $6 billion deal for Cavium Inc., less than two years after Starboard arrived and the company promptly ousted its founders. The deal helped send Marvell stock higher, and it has now returned about 157% since before Starboard arrived in February 2016, compared with roughly 127% from the iShares Semiconductor exchange-traded fund.

Mellanox's stock has dramatically underperformed the same ETF in recent years. The Israel and Sunnyvale, Calif.,-based company has returned about 12% in the past year but has lost 38% over the past five years, both worse than the ETF's 54% and nearly 300% return.

Marvell recently approached Mellanox about a potential transaction but was rebuffed, Starboard said in its filing, a response that helped inform Starboard's belief that Mellanox was hostile to potential deals, according to people familiar with the matter. Starboard's Peter Feld is on the board of Marvell.

No discussions are ongoing between the sides at this time, and Mr. Feld has said he would recuse himself from anything that could happen in the future, Starboard added.

Mellanox, with a $2.6 billion market value as of Monday's close, specializes in technologies for high-speed computing and is a leader in the InfiniBand systems that help power supercomputers, as well as ethernet products. Its high-powered products are used in the giant data centers that make cloud-computing possible. Chief Executive Eyal Waldman was a co-founder of the company in 1999.

Revenue since 2012 has soared, but it hasn't hit the bottom line as much. In 2016, Mellanox recorded $857.5 million in revenue, up from $500.3 million in 2012, but spending on research and sales and marketing combined rose to $456 million from just under $200 million.

Starboard has long played in the semiconductors space -- this is the firm's 12th stake of above 5% in a chip-related company -- and it has typically pushed for both margin improvement and deal talks.

That was the case for Marvell, where the activist arrived as the stock had slumped amid an accounting probe. Shortly afterward, Marvell's founders were ousted and Starboard gained board seats that gave the firm a role in selecting the next CEO. Monday's deal with Cavium is aimed at expanding Marvell's reach and helping it compete with bigger semiconductors. Starboard is sitting on investment gains of more than $440 million from that investment, according to filings.

The semiconductor space has been rife with deals, including Broadcom Ltd.'s unsolicited $105 billion attempt to buy Qualcomm Inc., which itself is trying to close a $39 billion deal to buy NXP Semiconductors NV. The deals come as technology companies try to push connectivity and ever-growing information feeds into everything from phones to cars, trends that rely on powerful, chip-driven computing.

Analysts from Benchmark Capital initiated coverage on Mellanox at the end of August, calling it a "ripe acquisition target for many companies." Though it listed Marvell as the most "logical" buyer, it also included other giant chip makers.

Write to David Benoit at david.benoit@wsj.com

(END) Dow Jones Newswires

November 20, 2017 18:27 ET (23:27 GMT)