Before the market open Wednesday, Mellanox Technologies announced a definitive agreement to acquire EZchip Semiconductor for $25.50 per share, or an implied transaction value of $811 million, or $620 million net of cash.
The deal is expected to be non-GAAP accretive immediately post-merger and create both revenue and operational cost synergies. Through the acquisition of EZchip (ticker: EZCH ), Mellanox ( MLNX ) will expand its data-center offerings by combining its layer 1-3 connectivity solutions for data centers with EZchip’s layer 3-7 processing solutions for carrier networks.
As a result of addressable new markets and customers for the combined product lines, Mellanox’s combined 2017 total addressable market (TAM) is expected to increase by $2.2 billion to $14.5 billion. The deal is expected to close by end of the calendar first quarter of 2016.
The total implied transaction value is approximately $81l million, or $620 million net of cash, and will be financed by Mellanox through the combined entity’s cash on hand and $300 million in fully committed debt financing. Under the terms of the definitive agreement, EZchip shareholders will receive $25.50 for each share of EZchip that they hold at the close of the transaction (about a 16% premium over Tuesday’s close).
The deal will expand data-center offerings and increase TAM through new customers and markets. Management expects to expand its data-center offerings by combining Mellanox’s layer 1-3 interconnect solutions with EZchip’s layer 3-7 network processing solutions. Since Mellanox and EZchip have very little overlap in products and customer base, management expects the combined product lines to increase Mellanox’s 2017 TAM by $2.2 billion to $14.5 billion.
Mellanox has more in Store
Mellanox management reiterated its focus on providing end-to-end solutions in the marketplace. Additionally, Mellanox will enter the telecom market through the acquisition of EZchip but management expects to remain focused on Mellanox’s data-center business.
Acquisition expected to be non-GAAP accretive on day one. Though management did not quantify synergies, management expects revenue synergies from addressing new markets and customers through combined product offerings. Additionally, management expects to focus on integrating products in 2016 and expects to see design wins in late 2016 and into 2017. Mellanox also expects operational cost synergies from combining office locations and sharing operational costs. Combined revenues for the company (trailing 12 months as of the second quarter) would be $668 million with combined pro-forma gross margin of 73% and pro forma operating margin of 23% (trailing 12 months).