Starboard Acquires Stake in Mellanox -- WSJ

By David Benoit Features Dow Jones Newswires

This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (November 21, 2017).

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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 boost 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 Mellanox spokesman said the company only learned of Starboard's investment Monday but welcomed the activist. "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," he said.

Shares of Mellanox jumped 5.8% in after-hours trading after The Wall Street 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. (See article on page B4.) The deal helped send Marvell's stock higher, and it has now returned about 157% since before Starboard arrived in February 2016, compared with roughly 127% for the iShares Semiconductor exchange-traded fund.

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Mellanox's stock has drastically 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 returns of 54% and nearly 300%, respectively.

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 continuing 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 greatly helped the bottom line. 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 semiconductor 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, the Marvell 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 semiconductor firms.

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 21, 2017 02:47 ET (07:47 GMT)