How Oracle inadvertently helped Nvidia spend $6.9 billion to win a deal away from Intel (INTC, ORCL, NVDA)

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Chip maker Nvidia announced the largest acquisition in its history on Monday when it said it planned to buy Mellanox for $6.9 billion cash.
It’s a big win for Nvidia which reportedly jumped into the bidding late and pulled the company away from Intel.
But the roots of the deal may have actually happened in 2018 when Oracle sold off its shares in Mellanox.

Chip maker Nvidia announced the largest acquisition in its history on Monday with its plan to buy Mellanox for $6.9 billion cash.

Mellanox was such a hot property that Nvidia reportedly won out over other bidders including Intel and Microsoft. Intel’s loss was particularly surprising since one of Mellanox’s board members, David Perlmutter, was a long-time Intel executive with a 30-year career there. He joined the Mellanox board shortly after he retired from Intel and is now working as a VC for Eucalyptus Growth Capital specializing in Israeli startups.

Mellanox makes what’s known as InfiniBand technology. This is superfast networking technology used for connecting components inside today’s biggest, faster "supercomputers," otherwise known as high performance computing (HPC). It is also used in the data centers that support supercomputers.

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This technology was considered to be the next big thing in building faster computers and faster data centers more than a decade ago, possibly even replacing Ethernet as the mainstream standard. But Ethernet got faster (as it always does) and InfiniBand became a niche product for high-performance computing applications. Intel purchased the other major InfiniBand company, QLogic, in 2012 for $125 million.

InfiniBand looked like it would simply whither on the vine

Paul Sakuma/AP ImagesThen two things happened to change both companies’ futures: big data and its child, artificial intelligence. The rise of big data meant cheaper ways for companies to store and sift through massive amounts of data for insights.

Artificial intelligence relies on machine learning which relies on big data. ML AI is where computers study massive numbers of examples of a concept in order to learn that concept.

Nvidia was pulled into the HPC market when its flagship product, graphics cards (originally created to improve video game performance in PCs) were used in these mammoth super computers to improve their performance.

With the rise of AI, those hefty supercomputer are taking on some of the gnarliest AI problems and Nvidia found a whole new market in HPC. For instance, the fastest computer in the world is an IBM supercomputer known as the Summit. It models supernovas, new materials, cures for cancer, genetics and the environment.

And this one supercomputer uses a cool 27,648 of NVIDIA’s GV100 graphics cards as well as 4,600 Mellanox network interface cards, Nvidia says.

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Nvidia dove headfirst into the AI chip market with an array of specialized products and is now considered the market leader. It has worked closely with Mellanox for years. Nvidia’s cards and chips are used in 127 of the Top 500 fastest supercomputers in the world while Mellanox’s network tech is used in 265 of them, Nvidia says.

Meanwhile, at CES in January Intel ramped up the competitive pressure on Nvidia by launching its own AI chips to challenge Nvidia’s lead. Intel’s Nervana Neural Network Processor for Inference (NNP-I) product was created with help from Facebook is slated for release in the second half of 2019, reports the Datacenter Knowledge trade news site.

A happy ending for, almost, everyone

When Nvidia got wind that Intel was in talks to buy Mellanox, it essentially had no choice but to launch a competing offer: an Intel-Mellanox combination would have given Intel a stranglehold on the InfiniBand market. So Nvidia jumped into the bidding, reported Israeli newspaper CTech.

Nvidia says that the combined companies are looking at a $60 billion market. Had Nvidia lost the bid, Intel, its biggest rival in AI chips could have walked with Mellanox and put a near stranglehold on that $60 billion market as well.

Interestingly, this whole sweet deal for Mellanox shareholders had its roots in pressure from an activist investor in early 2018. That’s when Starboard took an interest in Mellanox, tried to oust all of its directors and by June, managed to get three of its own board members appointed.

As this board fight took place, Oracle sold at least half of its stake taken in Mellanox. Oracle bought the 10% stake in Mellanox in 2010 (the days when InfiniBand was thought to be the next big networking thing) at around $20 a share In 2018, Oracle sold its stake for $63.90. By selling those shares, Oracle gave leverage to the activist investors who wanted to sell the company, Ronald Orol at The Street reported.

Fast forward to March, 2019 and Mellanox has officially gone to Nvidia’s open arms for $125 per share in cash. It’s a happy ending for all, except, perhaps, Intel.

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Source: Business Insider – jbort@businessinsider.com (Julie Bort)