If InfiniBand is going to be a major architecture in high-performance computing, it looks like Mellanox (Nasdaq:MLNX) will be a hard company to ignore. This developer of semiconductor-based connectivity products deepened its commitment to InfiniBand on Monday, announcing the acquisition of Voltaire (Nasdaq:VOLT) - a company that sells InfiniBand-based switches for servers used in high-performance environments. (Learn more about the tech industry in A Primer On Investing In The Tech Industry.)
IN PICTURES: 7 Forehead-Slapping Stock Blunders
The Terms of the Deal
Under the agreement, Mellanox will pay $8.75 a share in cash for Voltaire, for a total net deal value of $176 million. That deal implies a valuation of 1.6-times for Voltaire on an enterprise value-to-revenue basis. That valuation is a little light relative to Cisco (Nasdaq:CSCO) or QLogic (Nasdaq:QLGC), but Voltaire has never been profitable and is tiny in terms of its revenue base. QLogic is more than eight times larger in terms of revenue, and Ethernet rival Brocade (Nasdaq:BRCD) is 30-times larger.
What Mellanox Is Getting
In buying Voltaire, Mellanox is getting a company that is focused on switches for high-performance environments. Although that is not the bulk of the market today, the expansion of cloud computing and the overall growth of network data management needs suggests its an increasing important market. Not surprising for a small company, Voltaire's customer base is rather concentrated, with IBM (NYSE:IBM) and Hewlett-Packard (NYSE:HPQ) making up about 30% of the customer's revenue base.
That seems like a logical fit for Mellanox. Not only was Voltaire a customer of Mellanox, but they have a lot of overlapping customers, including IBM and Hewlett-Packard, as well. Although Mellanox had never done a deal before now, this seems like a logical outgrowth of a strategy to expand its connectivity business and the InfiniBand standard. Of course, it also increases the company's reliance on InfiniBand as an architecture. While the company is going up against Intel (Nasdaq:INTC), Broadcom (Nasdaq:BRCM) and Marvell (Nasdaq:MRVL) in the ethernet chip business and has some solid technology, it is not a major part of the company's revenue base today.
The Bottom Line
Mellanox feels at least superficially similar to companies like Xylan, Newbridge Networks and Foundry Networks - networking hardware companies that had some interesting products for emerging markets and ultimately got bought by larger players, Alcatel-Lucent (NYSE:ALU) in the case of Xylan and Newbridge, Brocade in the case of Foundry. Then again, it could go the other way and Mellanox could stay independent and grow into something like Juniper (Nasdaq:JNPR) or F5 (Nasdaq:FFIV), particularly if the size of this high-performance computing market exceeds expectations.
Mellanox is not cheap by any backward-looking methodology, but that is no surprise. Interestingly, though, it does not take incredibly ambitious cash flow growth assumptions to make this stock work. Better still, Oracle (Nasdaq:ORCL) has given its own vote of confidence by buying about 10% of the company on the open market. There are certainly no guarantees in a fast-changing and ridiculously competitive market like this, but Mellanox looks like its taking the steps to be a real player in what could be very interesting growth market. (For related reading, take a look at 4 Industry-Changing Tech Trends.)
Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!