You’ve Had Your Chips

Nvidia buying Mellanox

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What's going on?

In its biggest deal ever, US chipmaker Nvidia agreed on Monday to buy Israeli rival Mellanox for $7 billion.

What does this mean?

Nvidia’s proposing to stump up the $7 billion in cash – and raising eyebrows after it slashed its sales forecasts just six weeks ago. The company made under $3 billion of profit in 2018 and has never spent more than $400 million or so annually on acquisitions.

But Nvidia may feel desperate times call for desperate measures. Sales of its cryptocurrency mining chips have dried up, with gaming processors also crashing – and China’s economic slowdown is adding to Nvidia’s woes. The purchase of Mellanox, which makes cables and switches to transfer data, should help the chipmaker shift its focus more toward data centers. Data center revenue already makes up nearly a third of Nvidia’s sales – and it’s a growing industry, thanks to the rise of cloud computing.

Why should I care?

For markets: Investors approve of the match.

Mellanox’s stock rose on Monday – Nvidia’s offering a 14% premium to the company’s share price on Friday, potentially representing a nice windfall for its investors. Indeed, Mellanox shares are up more than 50% since rival chipmaker Intel first expressed interest in the company in January (and was subsequently outbid). Nvidia’s stock also rose on Monday, by 7%. The company reckons the deal will add to its bottom line straight off the bat (as opposed to years down the line), which probably helped boost investors’ confidence.

The bigger picture: Chips looked soft last year.

Japanese telecoms giant and tech investor SoftBank sold its 5% stake in Nvidia in January. But the chipmaker’s problems affected its rivals too. Last year, Qualcomm was among several big names lowering forecasts after major customer Apple said it had sold fewer iPhones than expected. That being said, chipmakers reporting quarterly results recently haven’t fared as badly as feared. Perhaps more mergers could help others avoid a short circuit in 2019…

Originally posted as part of the Finimize daily email.

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