Eyal Waldman, the Israeli army major who built Mellanox Technologies Ltd. (MLNX:US) into the best-performing stock on the nation’s benchmark equity index, is determined to stay independent while peers sell out.
Unlike startups bought by Silicon Valley tech giants, Waldman is confident his 13-year-old company, which makes chips that help connect servers, can be an acquirer, even after disappointing investors for the first time with a fourth-quarter forecast (MLNX:US) that missed analysts’ estimates. While the stock lost more than half its gains, it’s still up 111 percent this year, the best on the Tel Aviv’s TA-25 Index.
“We definitely think we can grow faster than other companies we work alongside,” Chief Executive Officer Waldman, 52, said in a Nov. 5 interview in Tel Aviv. “As long as we can grow faster than we could being part of a larger company, it’s better for our shareholders that we stay independent.”
Waldman will soon face increasing competition from one of his customers and former employer, Intel Corp. (INTC:US) Mellanox sank to a four-month low last week on concern the world’s largest maker of chips is gaining ground on its InfiniBand technology. Becoming an acquirer would set the CEO apart in Israel’s high- technology industry.
Flash-memory producer Anobit Technologies Ltd. of Herzlia Pituach was bought by Cupertino, California-based Apple Inc. for an undisclosed amount on Jan. 10. Oridion Systems Ltd. (COV:US), a maker of medical-safety devices, agreed to a $295 million takeover by Dublin-based Covidien Plc on April 5. RadVision Ltd., a Tel Aviv maker of video-conferencing systems, was sold on June 6 for $128 million to Avaya Holdings Corp. of Basking Ridge, New Jersey.
With 148 deals totaling $5.9 billion in 2012, Israeli companies are the third-most popular takeover targets in the Middle East and Africa after Egypt and South Africa, according to data compiled by Bloomberg. Mergers are increasing as initial public offerings remain dormant. Caesar Stone Sdot Yam Ltd. (CSTE:US), a maker of stone products, was the only Israeli company to go public this year, with an $73.3 million initial share sale in New York.
Israel, whose population of 7.8 million is similar in size to Switzerland’s, is home to more startup companies per capita than the U.S. and has 54 companies traded on the Nasdaq Stock Market, the most of any country outside the U.S. after China.
Mellanox New York-listed shares rose the most this year in the Bloomberg index of the most-traded Israeli companies listed in the U.S. and ranked 10th among the 379 shares in the Nasdaq Computer Index (IXK), with a 113 percent rally, on surging demand from suppliers of information storage and data systems.
Paring a Rally
Sales for Mellanox, based in Yokneam Elit, a town southeast of Haifa in northern Israel, have exceeded analysts’ estimates every quarter (MLNX:US) since its 2007 IPO, according to data compiled by Bloomberg. The company, 8.9 percent owned by Redwood City, California-based Oracle Corp. (ORCL:US), has benefited from demand for InfiniBand, which is used to transfer and store data in high-end computing and data centers.
That success is facing its biggest challenge yet as investors speculate Santa Clara, California-based Intel is close to selling a competing product.
Mellanox shares pared their 283 percent surge this year through Sept. 6 after its fourth-quarter revenue outlook (MLNX:US) of $145 million to $150 million was below the $156.6 million estimate of analysts surveyed by Bloomberg.
While Intel currently buys InfiniBand chips from Mellanox, in 2015 the U.S. company plans to start supplying its own 100 gigabit per-second devices, according to Clal Finance Batucha Brokerage Ltd.
Intel agreed in January to buy QLogic Corp.’s InfiniBand business for $125 million. Three months later the company said that it will spend $140 million to acquire Cray Inc. (CRAY:US)’s technology to connect server chips.
“The challenge of Mellanox will be to be able to leverage its dominant position in the high performance connectivity market and compete with an industry gorilla like Intel,” Jonathan Kreizman, an analyst at Clal in Tel Aviv, said in a telephone interview on Nov. 11.
Waldman says he’s undeterred (MLNX:US) by Intel’s market penetration as Mellanox has a product customers prefer.
“We are better at execution,” Waldman said by phone from Sunnyvale, California on Dec. 6. “It will be a challenge for Intel to take some of the design wins.”
Mellanox’s name comes from combining Xerox -- an adviser told Waldman that many company names, like Xerox, don’t have a meaning -- the word millennium, because the company was founded in 1999, and Ella for his ex-wife, to whom he attributes much of his success.
Spending on cloud services, which let users store data and software on servers that can be accessed anywhere, will reach $100 billion in 2016, up from about $40 billion this year, Framingham, Massachusetts-based data research firm IDC said in its August report.
“Mellanox right now has the fastest switch,” said Louis Navellier, the chief investment officer of Navellier & Associates Inc. in a Nov. 19 interview. “Everyone wants to be in the cloud, so everyone wants the Mellanox switch because everyone wants the fastest server time,” said Navellier, whose West Palm Beach, Florida, firm manages $3.5 billion, including shares of the Israeli company.
Sales for the three months ended September more than doubled to $156.5 million, beating the $153 million mean estimate of 13 analysts surveyed by Bloomberg. Net income surged 10-fold for the quarter to $48.4 million, the company said Oct. 17. Revenue is expected to grow 21 percent next year according to the mean estimate of 13 analysts surveyed by Bloomberg.
Waldman, a kite boarder and scuba diver, started in Israel’s high tech industry before he finished his masters’ degree in electrical engineering from the Technion Israel Institute of Technology in Haifa. “My mother still thinks I am a failure because I don’t have a Ph.D.,” he said. He owns a 3.8 percent stake in Mellanox valued at about $111 million.
He spent 18 months as a sub-contractor at Haifa-based Elbit Systems Ltd. (ELST:US), then three years at Intel before he left to start his first company, Galileo Technology Ltd. The company was acquired by Marvell Technology Group Ltd. (MRVL:US) for $2.2 billion in January 2001, two years after Waldman left because of disagreements with his partners.
“I felt that Galileo should do acquisitions and the chief executive and chief financial officer decided that wasn’t the right thing,” Waldman said.
Mellanox went public on Feb. 7, 2007 issuing 6 million shares at $17, raising $102 million, according to data compiled by Bloomberg. The company acquired Voltaire Ltd., an Israeli maker of switches for $179 million in November 2010.
Waldman said in an interview in July that he intends to use reserves “mainly for mergers and acquisitions.” At the end of the third quarter the company had $398 million in cash and equivalents, according to data compiled by Bloomberg.
A multi-tasker who once spent a night at a command center directing Israeli troops while instructing Galileo’s U.S. team on a conference call, Waldman said he runs the 1,300-employee company as a startup.
“Eyal is the kind of person you want to be in a small boat with,” co-founder Ron Ashuri, who is currently the company’s vice president of engineering, said in a phone interview on Oct. 10.
There are parts of the job Waldman doesn’t enjoy, like getting onto a plane alone, he said during an Oct. 11 interview in his 15th floor apartment in Tel Aviv’s Ramat Aviv Gimmel neighborhood. “I don’t like to do presentations and I don’t like giving feedback.”
He pampers himself with a Porsche 911 turbo convertible and Range Rover parked at his U.S. home, and a BMW 330i convertible and second Range Rover garaged in Israel.
The threat of Intel could also be an opportunity for Mellanox because it shows how important the technology has become for the data industry, according to DS Securities & Investments.
“Even if Mellanox will be faced with new competition, chances are that the whole market will grow,” Eran Jacoby, the head of research at DS Securities in Tel Aviv, said in a telephone interview on Oct. 10. “Mellanox will also stand to benefit from this growth.”
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