Mellanox Tech (MLNX 92.78, +3.89, +4.38%) is trading higher today on a
report from The Times of Israel that quotes a financial paper called TheMarker
in indicating that Microsoft (MSFT) is interested in acquiring MLNX, which is a
supplier to Microsoft.
The article says that Microsoft sees an acquisition as a way to strengthen its services in cloud computing as it competes with the likes of Amazon (AMZN) and Google (GOOG). The article goes on to say that Microsoft has hired investment bankers Goldman Sachs to manage negotiations with Mellanox, according to TheMarker, while Mellanox is represented by JP Morgan.
This is not the first time that MLNX has been named as a potential target. In November 2018, CNBC.com reported that Xilinx (XLNX) hired Barclays to advise on a bid to acquire Mellanox after approaching the chipmaker with an offer.
Mellanox is an Israel-based supplier of interconnect
solutions and Ethernet technologies. Servers, storage systems, and embedded
system equipment all need to talk to each other and transmit data between them.
Mellanox makes the interconnections that allow these pieces of equipment to interact
with each other. Its products include adapters, gateway and switch ICs, adapter
cards, switch systems, gateway systems, software, and cables. Having
high-performance interconnects is important because they remove bottlenecks by
providing faster transfers of data, latency reduction, and more.
MLNX has two product technologies, Ethernet and InfiniBand, that it says are truly leaders in their respective markets. Ethernet switches have been key drivers of revenue for MLNX. More OEMs are using its Spectrum switches, and MLNX is now penetrating into the storage switching market with Spectrum acting as a storage fabric in some applications.
MLNX remains confident that it's in the early stages of the transition to speeds of 25Gbps and above, which translates to a multi-year runway of growth. MLNX expects the majority of that transition to occur over the next several years, meaning that 25Gbps and higher would represent more than 50% of the market by 2021.
While MLNX continues to see good growth of its Ethernet switch business (expected to be up 70% for the year), its InfiniBand segment saw revenue decline in Q3 due to several deals that slid into Q4. MLNX believes that InfiniBand sales will grow in the low-single digits in 2018. For 2019, MLNX says it has amazing backlog visibility into Q1, which is not typical.
This will be an interesting stock to watch in the coming months as reports of two different companies looking at the same target does not happen every day. A deal would make sense for either company. MLNX is an attractive company that sees itself being at the leading edge of a significant upgrade cycle. The company is well-positioned to take advantage of the move to higher performance networks that will continue for multiple years.