What: Shares of EZchip (UNKNOWN:EZCH.DL), a provider of network processors, rose on Wednesday on news that Mellanox Technologies (NASDAQ:MLNX) was acquiring the company for $25.50 per share. At 2:10 Wednesday afternoon, EZchip stock was up about 14%, just shy of the buyout price, while shares of Mellanox had slumped about 6.5%.
So what: The deal is valued at $811 million, or about $620 million net of cash, and it's expected to close during the first quarter of 2016. Mellanox will use both cash on hand as well as $300 million in debt to finance the transaction, and the deal is expected to be accretive to earnings on a non-GAAP basis immediately.
Mellanox points to the acquisition as "a step in the company's strategy to become the leading broad-line supplier of intelligent interconnect solutions for the software-defined data center." According to the company, "The addition of EZchip's products and expertise in security, deep packet inspection, video, and storage processing enhances Mellanox's leadership position, and ability to deliver complete end-to-end, intelligent 10, 25, 40, 50, and 100Gb/s interconnect and processing solutions for advanced data center and edge platforms."
Now what: It's unclear exactly why shares of Mellanox sold off in response to the news, although an analyst from Summit Research points to the company's failure to reiterate its guidance during the conference call discussing the deal. Shares of EZchip are well below highs reached in early 2012, but Mellanox is still paying a fairly high price for EZchip, about 6.4 times trailing-12-month sales. Mellanox, however, expects that combining the two companies will create benefits that justify the price tag.
Timothy Green has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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.