Will Broadcom Acquire Mellanox?

With Broadcom out of the cellular business, it may now look to grab more content share in infrastructure and networking. Picking up Mellanox may be a way to do that.

Jun 18, 2014 at 10:05AM

Several years ago, semiconductor stalwart Broadcom (NASDAQ:BRCM) made a fairly aggressive pass at picking up network convergence vendor, Emulex (NYSE:ELX) for a cool $11/share (after initially bidding $9.25). Emulex's management pushed back hard, claiming that this materially undervalued the company. Of course, Emulex's stock sits at $5.58 today, suggesting that it should have taken the offer. While Emulex is unlikely to get a second shot at getting taken out by Broadcom, Mellanox (NASDAQ:MLNX) -- a competitor to Broadcom in a number of key areas -- could be a great fit for Broadcom.

What does Mellanox bring to the table?
Broadcom is the world leader in Ethernet switches and network interface card ("NIC") silicon with industry-leading market share.


Source: Broadcom

Mellanox, too, competes in Ethernet. Now, it's not as large a player as Broadcom or the other players shown on the above slide, but Mellanox grew Ethernet to become 19% of its revenues in the most recent quarter (roughly $18.75 million) and expects to continue that growth. So, from a consolidation perspective, picking up Mellanox might make sense, but that doesn't seem like enough.

It's all in the InfiniBand
What Broadcom would be interested in -- if it were interested in Mellanox -- would be the company's InfiniBand business. Ethernet is the cost effective, "standard" way to connect everything up. But for those who need more bandwidth/performance (think high performance computing), there's an interconnect known as InfiniBand.

Until recently, there were only two vendors that developed and sold InfiniBand switches and adapters: QLogic (NASDAQ:QLGC) and Mellanox. QLogic's technology, however, fell pretty far behind what Mellanox had and as a result ended up selling the business to Intel (NASDAQ:INTC), which presumably has been nurturing it and preparing that IP for integration onto its Xeon and Xeon Phi processors at some point down the line.

Could Broadcom see a strategic benefit?
The big "problem" with Mellanox today is the fear that Intel will integrate much of the relevant InfiniBand silicon onto tis processors and render Mellanox's stand-alone business obsolete. While there is certainly risk that Intel can do this for some variants of its processors, the argument that Mellanox bulls rebut with is that Mellanox can stay one step ahead of what Intel is doing on the InfiniBand side of things with its discrete products.

If the market for discrete InfiniBand adapters along with the attendant switches remains robust and continues to grow, then Broadcom could see real strategic value in adding that to the product portfolio. That said, strategic may not be enough for a company like Broadcom that has shown time and again that it will very dispassionately divest businesses that underperform, so the numbers need to make sense.

What would the financials look like?
Mellanox today trades at a market capitalization of $1.57 billion, with about $340 million of that in net cash on the balance sheet. So the underlying business is valued at about $1.23 billion. In exchange for that, investors get a business that should be on-track to do about $443 million in sales this year (per current sell-side consensus) and then $541 million in the following year.

Additionally, on a non-GAAP basis (excluding share-based comp), Mellanox is on track to do about $0.81/share this year and then should ramp up to $1.58/share next year (as Mellanox will be deep into the ramp of Intel's Grantley platform, which will drive high performance computing sales) or $35.64 million and $69 million, respectively. As far as Broadcom goes, this would translate into incremental EPS of just $0.13 for the coming year.

Foolish bottom line
The idea here is interesting, particularly given that by picking up Mellanox, Broadcom grabs more Ethernet share and becomes the world's leading supplier of InfiniBand-related products. But in the near term, this would not add significantly to Broadcom's bottom line, and of course fears that Intel's own InfiniBand business could eventually marginalize Mellanox's business will be an important part of any such decision.

That said, one should never buy a stock solely on a buyout thesis since this would simply be gambling and not investing. But for investors already convinced that Mellanox's business is undervalued here, the idea of a buyout by the likes of Broadcom can, at the very least, be interesting speculation.

A Mellanox/Broadcom hookup would be neat, but Apple's next big thing could be revolutionary
Apple recently recruited a secret-development "dream team" to guarantee its newest smart device was kept hidden from the public for as long as possible. But the secret is out, and some early viewers are claiming its everyday impact could trump the iPod, iPhone, and the iPad. In fact, ABI Research predicts 485 million of this type of device will be sold per year. But one small company makes Apple's gadget possible. And its stock price has nearly unlimited room to run for early in-the-know investors. To be one of them, and see Apple's newest smart gizmo, just click here!

Ashraf Eassa owns shares of Intel and Mellanox Technologies, Ltd.. The Motley Fool recommends Intel. The Motley Fool owns shares of Intel. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at www.fool.com/podcasts.

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to www.fool.com/podcasts, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.


Compare Brokers