Last March, Nvidia announced an agreement to acquire Mellanox for a total enterprise value of $6.9 billion. Pursuant to the agreement, Nvidia will acquire all of the issued and outstanding common shares of Mellanox for $125 per share in cash.
I’ve covered the product details of this acquisition in detail with an analysis last April and one last week. To summarize, the Mellanox acquisition will help increase Nvidia’s competitive lead on GPUs, while also slightly reducing the requirement for CPUs from companies like Intel and AMD. Mellanox can be leveraged to speed up GPUs while closing the gap in latency performance with FPGAs (Xlinx and Intel/Altera). This is a strategic acquisition for Nvidia and Mellanox to become the strongest combination for artificial-intelligence and machine-learning computations. Nvidia beat out Intel and Microsoft in the bid for Mellanox.
Mellanox is trading below the $125 price at $108, time of writing. This is likely due to concerns the acquisition won’t be approved by Chinese regulators, similar to Qualcomm’s failed acquisition of NXP Semiconductors. The deal would have been the biggest semiconductor takeover globally at $44 billion. According to sources from China, the case was not approved for anti-monopoly reasons rather than trade-war tensions.
Nvidia and Mellanox are in separate categories and don’t pose security risks from communications, therefore, it is less likely this acquisition will be blocked. In addition, China is a large customer of Nvidia and stands to benefit from the combined company. China needs this acquisition for its sizable AI ambitions to reach a domestic AI market of $150 billion up from the $6.7 billion today. These plans were published in 2017.
We also see some company insider activity with Stephen Sanghi, a director at Mellanox, buying shares worth $2.2 million at $110 per share in June 2019. Sanghi is also the CEO of Microchip Technology. At this price, Sanghi will make 11.6% return with an annualized return of over 21% if it closes by the end of 2019.
The acquisition is an all-or-nothing gamble with technical analysis indicating shares could go as low as $72 if the acquisition is not approved. If the deal is approved, investors have a merger arbitrage worth about 15%.
My best guess is that China will not block this acquisition as it does not constitute a monopoly, is a much smaller company than NXP, and accelerates Nvidia’s product to compete with Intel/Altera, an acquisition that closed at $16.7 billion in 2015. This is a guess and is dependent on what Chinese regulators decide. From a tech product perspective, there are no obvious issues with regulatory approval.
Technical Analysis
By Knox Ridley
Price Action
Mellanox is currently in a strong uptrend, which we are able to track with the dark blue trend channel in the above graph. You’ll notice how well the price action respects this channel as both support and resistance through-out the move up as well as the slight retrace we are in now. Mellanox was already trading through the upper trend channel when the Nvidia acquisition was announced, causing the price to gap-up an then trade slightly higher. When a stock breaks through the initial trend channel with as much force as Mellanox has and then begins to retrace, we can draw a new channel to gauge the likely points of attraction for a further retrace as well as a new advance. You’ll be able to see this is the dotted blue lines in the above graph.
In short, the price is trending towards the $105 support level, which coincides closely with the 200-day moving average. Expect strong support here. The resistance is $121
Scenario 1: If we break the $105 support, there is not much support until the $91-$88 range, which coincides with the 38.2% retrace as well as the lower channel of the trendline. This will be very strong support for any additional retrace.
Scenario 2: The $105 trendline holds, and we maneuver to all new highs above the green resistance level, around $121. If the Nvidia deal is allowed to go through, which we believe it will, expect this move to be sudden.
Internal Strength
The internal strength, as outlined by the MACD, is currently in a weak spot. It turned hard on the current retrace and is making higher lows, which is a good sign for building momentum. As long as the MACD does not break the -2.4 line to make new lows, then we can expect the price to build momentum.