Nvidia Corp.'s proposed $6.9 billion deal to acquire Mellanox Technologies Ltd. is a play to diversify into higher-margin enterprise markets as Nvidia looks to capitalize on growing opportunities in artificial intelligence and the cloud, analysts said.
Mellanox is a dominant player in the data center networking market, so while the deal would mark Nvidia's biggest acquisition to date, it is also considered a safe bet by analysts. Under the terms of the deal, Nvidia will pay $125 a share, a premium compared to Mellanox's March 8 share closing price of $109.38. The deal is expected to close by the end of 2019.
Until now, Nvidia's acquisitions included smaller companies focused on gaming, supercomputing, software and connectivity. Nvidia's last major acquisition was in 2011 when it bought software-based modem company Icera for $352 million. That deal did not pan out; Nvidia's Icera-related operations were shut down in 2015.
The Mellanox deal marks the union of two major data-center players, and it gives Nvidia more control of the data-center technology stack. Mellanox's connectors provide a superfast highway for computing resources in data centers to communicate. Nvidia's graphics chips are widely used in supercomputing and artificial intelligence applications in data centers, with Mellanox technology serving as the underlying connector to link its chips with computers and storage.
During a conference call to talk about the acquisition, Nvidia CEO Jensen Huang said there was a growing demand for "accelerated computing" such as that provided by Nvidia chips and "accelerated networking" provided by Mellanox.
"Optimal design will translate to higher data center throughput and lower operating costs," Huang said, adding that Mellanox was a strategic fit from a technological perspective.
The Mellanox deal should boost sales of Nvidia's graphics cards for data centers. That could hurt Intel Corp., which was also bidding for Mellanox, and Advanced Micro Devices Inc., which has a burgeoning product strategy designed to challenge Nvidia in the data center market. Nvidia's graphics processing units, or GPUs, are used in 127 of the world's fastest supercomputers compiled by the Top500 list, a nonprofit organization that tracks supercomputers. Mellanox's connectors are in 265 of those computers.
The acquisition represents a switch in Nvidia's business model toward higher-margin enterprise markets, which could insulate the company from the lower margins and volatility of the consumer and gaming markets, analysts said. Nvidia reported a 24% year-over-year decline in the fourth quarter of fiscal 2019 revenue due to lower-than-expected demand for graphics cards in markets like China. Nvidia's revenue in the quarter was $2.21 billion.
Nvidia's acquisition of Mellanox should be a synergistic move between the two companies, said Patrick Moorhead, president and principal analyst at Moor Insights & Strategy, a tech-focused research firm.
"Both Nvidia and Mellanox are big in the high-performance computing, machine learning, automotive, public cloud and enterprise data-center markets, which could bring even more value to customers when combined. GPUs need the fastest I/O [input/output], and Mellanox is one of the best at it," Moorhead said.
Nvidia is trying to expand on its fast growth in the data center, said Jim McGregor, principal analyst at Tirias Research, another tech-focused research firm.
While Nvidia is already a major provider for artificial intelligence hardware in the cloud, analysts said the Mellanox deal could be a hedge to protect itself as more applications move to the cloud. For example, cloud-based gaming could result in more demand for Nvidia data-center graphics processors, while slowing down shipments of high-end desktop GPUs widely used in gaming.
However, the acquisition did not immediately make sense to Jon Peddie, president of Jon Peddie Research, which focuses on graphics research. Nvidia cannot grow in the PC business, and it has limited growth opportunities in automotive. The higher prices of data center products is Nvidia's best hope to boost margins.
"However, that market too is limited and not growing as fast as it did, and there's plenty of competition," Peddie said.
Mellanox technology could be key if autonomous cars can remain connected with 5G networks, which are expected to strain data centers, Peddie noted, though he remained skeptical of the deal.