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Wall Street analysts approve
Nvidia
S (NVDA) purchase agreement
Mellanox Technologies
(MLNX) can only mean one thing: M&A in the semiconductor industry is alive and well.
It's not just that Wall Street analysts approve the acquisition, even if they do. Raymond James analyst Chris Caso believes the deal will add 36 cents to Nvidia's earnings. SunTrust analyst William Stein believes that the agreement "accretion" will be 40-50 cents or 6 to 8% of Nvidia's estimated calendar 2019 earnings. Based on these figures, the market appears to be effective today. Nvidia shares closed 7% higher at just over $ 161 per share.
Analysts believe the deal is strategically meaningful because it improves Nvidia's competitiveness in the growing cloud computing market. (Mellanox makes technologies that connect computers in a data center.) But that agreement would also have made sense to other companies. Although it is probably stupid to make a list of low-capitalization semiconductor companies, hoping more offers, investors should check in on other companies that have expressed interest in Mellanox, including
Microchip Technology
(MCHP),
Xilinx
(XLNX) and
Marvell Technology
(MRVL).
A Marvell connection is not difficult to find. The Mellanox acquisition gives a great gain for activist hedge fund Starboard Value. It took a starting position at the end of 2017 when the Mellemox share was around $ 47 per share. Peter Feld, board member of starboard, was director of Marvell and Marvell bought Cavium in 2018. Cavium also produces products for cloud data centers.
This agreement may push Marvell to act, or it may push others to consider Marvell. The shares are trading for around 20 times estimated 2019 earnings and increased by 3.8% today, just above
Nasdaq Composite is
increase of 150 points, or 2%, Monday.
Microchip also has Mellanox connectivity, its CEO Steve Sanghi, sitting on Mellanox's board. Microchip shares trade for 13 times estimated 2019 revenue-a discount on this agreement. With a market value of $ 21 billion, it is not clear whether Microchip is predator or prey.
SunTrusts Stein pointed out in a note to clients today that Xilinx and Mellanox work together on Mellanox Innova-2 product. He added that the Xilinx management says they are more focused on M&A as a growth driver. Xilinx may be disappointed, it missed this opportunity.
Overall, Marvell, Xilinx and Microchip are in the middle of the package when it comes to semiconductor size. But the size of this industry is not evenly distributed.
The five best North American semiconductor environments are
Intel
(INTC),
Broadcom
(AVGo)
Texas Instruments
(TI), Nvidia and
Qualcomm
(QCOM). The quintet combined market is nearly $ 600 billion, which is about twice as much as the other 75 or so the semiconductor companies are trading on US stock exchanges.
The largest companies were also interested in Mellanox. New Street Research analyst Pierre Ferragu thinks
Intel
(INTC) bid for Mellanox. "Intel is sticking to its original $ 5.6 billion deal, reflecting a financial discipline that we didn't use on Intel. A very promising development," said Ferragu Barrons . He is considering Intel shares Buying with a $ 70 price target
Indeed, an analyst argues that Nvidia made the deal so Intel could not. "Nvidia's deal is defensive because Intel was one of those interested," explains Raymond James & # 39; Caso. "Nvidia uses an interconnect called Infiniband that Mellanox pioneers, Intel is the only other company that can deliver it." Intel also announced a new open source interconnect technology today: calculate explicit link. "It's not an accident that Intel released this day in the Mellanox agreement," Caso speculates.
All activity is very dramatic, and it supports the idea that M&A activity is likely to increase. "The semiconductor industry has been consolidating for a while," says Caso. "It's still part of the story."
After a semiconductor downturn in 2018, technological management services look like the values they see in the market today. already reflected in the stock prices though
Philadelphia Semiconductor Index
(SOX) is up almost 17% year to day. Still, it is down 8% from 52 weeks high, and more M&A can help the sector reach new heights.
Write to Al Root at allen.root@dowjones.com
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