Nvidia grabs Mellanox out from under Intel’s nose

After months of speculation, Mellanox found a suitor — and it was a surprise, to say the least. GPU leader Nvidia snatched up the networking vendor for $6.9 billion, topping a rumored previous offer of $6 billion from Nvidia’s nemesis, Intel.

The acquisition ends months of rumors of a suitor for Mellanox. Intel, Microsoft, and Xilinix were all reportedly bidding for the Israeli company, which specializes in high-speed networking.

Mellanox Technology was formed in 1999 by a former Intel executive and was a pioneer in the early adoption of InfiniBand interconnect technology, which along with its high-speed Ethernet products is now used in over half of the world’s fastest supercomputers and in many leading hyperscale data centers.

It will also be far and away the biggest acquisition in Nvidia’s history. The firm has grown entirely organically, and its few acquisitions have been relatively small, so this is somewhat out of character.

“The emergence of AI and data science, as well as billions of simultaneous computer users, is fueling skyrocketing demand on the world’s data centers,” said Nvidia founder and CEO Jen-Hsun Huang in a statement.

“Addressing this demand will require holistic architectures that connect vast numbers of fast computing nodes over intelligent networking fabrics to form a giant data center-scale compute engine,” he added.

At $6.9 billion, that’s almost half of Nvidia’s $11.7 billion in annual revenue for 2018 and nearly wipes out the $7.4 billion in cash the company was holding. Mellanox’s net profit for fiscal 2018 was $134 million, putting the purchase multiple of 52 times earnings.

“I am flabbergasted at what they paid for it. I don’t get those ratios at all,” said Jon Peddie, president of Jon Peddie Research, which follows the graphics market. “Two things we know. One, Jen-Hsun doesn’t do dumb things and two, he doesn’t throw money around. Those two tell me he has something figured out that I don’t understand.”

Peddie speculates that this deal is designed to goose Nvidia’s own interconnect effort, NVLink.

“It’s not cheap to design high-speed communications networks. It’s as bad as designing a GPU. Mellanox can close the gap with their tech. My speculation is the next-generation GPU will get Mellanox next-gen communications stuck in it that is better than or equal to CXL,” he said, in reference to the new high-speed interconnect announced by Intel and partners.

Jim McGregor of Tirias Research also believes it’s a data center play.

“Nvidia is trying to shore up its position in the data center because that’s where it’s still growing. It helps build out its strategy from a single box solution to a multi-box solution. So it doesn’t have just the stuff in the box; it has the stuff to connect the boxes,” he said.

But had an interesting tidbit to share. He was on a conference call with Huang, who said, “The only reason we acquired them is they called us.” Mellanox said they were getting unsolicited offers and said they were pretty good, and they called Nvidia because the two companies have a long-standing relationship.

“I think it was a cultural exchange because they like working with Nvidia and preferred working with them. It sounds like both sides wanted it to happen but it was going to be expensive,” McGregor said.

And if it gives Nvidia a chance to thumb its nose at its hated rival Intel, so much the better. The Silicon Valley is a fairly chill place of friendly competition, but you rarely see two companies that hate each other more than Intel and Nvidia.

Nvidia and Mellanox expect the deal to close by the end of this year. And Nvidia said “customer sales and support will not change as a result of this transaction.”