Bloomberg News

Intel Deal Steels Mellanox for Market Control: Israel Overnight

February 23, 2012

Feb. 19 (Bloomberg) -- Mellanox Technologies Ltd., the Israeli adapter maker that reported record 2011 sales, said it’s ready to take on Intel Corp. in the business of data transfer after the world’s largest chipmaker became its biggest rival.

Shares of the Yokneam Elit, Israel-based company plunged the most in four months in New York after QLogic Corp. disclosed on Jan. 23 the sale of its fast data transfer and storage systems assets to Intel for $125 million in cash, boosting competition for the Israeli firm, which controls 85 percent of the market.

“Even if we’ll have a smaller part of the pie, it’s a bigger pie now,” Mellanox Chief Executive Officer Eyal Waldman said in a Feb. 17 interview at Bloomberg’s headquarters in New York. “The acquisition shows the technology is required and now people feel more comfortable that Mellanox and Intel are dominating the market.”

Mellanox, which reported better-than-estimated fourth- quarter earnings at the end of January, surged to a record in both New York and Tel Aviv last week, leaving the U.S.-traded stock at a 60-cent discount to the Israeli shares. The Bloomberg Israel-US 25 Index of the largest U.S.-traded Israeli companies climbed 0.9 percent to 91.98 last week, while the TA-25 Index declined 1.1 percent to 1,105.21.

U.S. shares of Mellanox gained 3.3 percent to $37.85 last week, touching an all-time high of $38.11 on Feb. 15. The Tel Aviv stock climbed 3.8 percent to 143.80 shekels, or the equivalent of $38.50.

‘Like Baby Food’

Mellanox, whose products are used at data centers, investment banks and stock exchanges to transfer and store data quickly, will probably post a 30 percent increase in revenue this year, according to the median estimate of nine analysts surveyed by Bloomberg.

Orders should remain consistent even with mounting concern about a Greek bailout and the global economy, Waldman said.

“Technology spending is like baby food, there’s always going to be a need for it,” he said. “There’s so much data out there and people want to have fast and easy access to it.”

The global market for cloud computing, which allows users to store data and programs on offsite computers and access them via the Internet, is predicted to rise to $241 billion in 2020 from $40.7 billion in 2011, according to Forrester Research Inc.

Waldman -- who worked from 1989 to 1993 at Santa Clara, California-based Intel’s office in Haifa, where he holds a patent on the synchronization mechanism of future 64-bit architecture -- established Mellanox in 1999. He sold a chip designer he founded, Galileo Technology Ltd., to Hamilton, Bermuda-based Marvell Technology Group Ltd. for $815 million of stock in 2001.

‘Not Standing Still’

Mellanox’s product is more advanced than that of QLogic and Intel will have to come up with an equivalent technology before the Israeli company makes improvements, he said.

“It will take Intel some time until they have something that’s comparable to what we have,” Waldman said. “And don’t forget, we’re not standing still.”

“Our acquisition of QLogic’s Infiniband business opens up new opportunities for competition and innovation in supercomputing,” Radoslaw Walczyk, a spokesman for Intel, said by e-mail on Feb. 17. “Their fabric technology is used in many of the world’s top supercomputers today and supplements our current portfolio.”

Mellanox, which bought Voltaire Ltd. for $208 million last year, has about $63 million in cash from operations and is in talks with several companies for another possible acquisition.

“A lot of companies are approaching us,” Waldman said. “We’ll only do another acquisition if we think it will help us grow faster.”

Oracle Investment

Oracle Corp., the world’s second-largest software company that bought a 10.2 percent stake in Mellanox in October 2010, is basing future growth on the Israeli company, he said. The share deal was struck to prevent a “hostile takeover,” Waldman said.

Israel, whose population of 7.8 million is similar in size to Switzerland’s, has about 60 companies traded on the Nasdaq, the most of any country outside the U.S. after China. The country is also home to more startup companies per capita than the U.S.

Allot Communications Ltd., an Israeli maker of high-speed networking equipment, climbed 8.4 percent to $17.48 last week, the biggest five-day increase since Dec. 2. The company’s Tel Aviv shares retreated 9.1 percent to 61.38 shekels in the same period, or the equivalent $16.41. The $1.1 premium was the biggest among dually-traded companies.

‘Strongly Positioned’

“Business momentum remains solid,” Ittai Kidron, an analyst at Oppenheimer Holdings Inc., wrote in an e-mailed report last week. “Allot is strongly positioned to benefit” from expansion in mobile companies, he said.

Perrigo Co., the largest U.S. maker of generic over-the- counter drugs, advanced 1.7 percent to $94.90 last week as its Israeli shares fell 3.9 percent to 351.30 shekels, or the equivalent of $93.93.

The Allegan, Michigan-based company was rated “overweight” in initial coverage by Morgan Stanley.

“Perrigo is a long-term double-digit earnings growth company,” David Risinger, an analyst at Morgan Stanley in New York, wrote in an e-mailed report on Feb. 17. “Perrigo is among the best positioned for long-term U.S. generics growth.”

--With assistance from Ian King in San Francisco and Zachary Tracer in New York. Editors: Marie-France Han, Emma O’Brien

To contact the reporter on this story: Tal Barak Harif in New York at tbarak@bloomberg.net

To contact the editor responsible for this story: Emma O’Brien at eobrien6@bloomberg.net


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