Mellanox Technologies (MLNX), a maker of networking chips and switches, has agreed to pay $218 million or $8.75 per share for rival Voltaire (VOLT). The deal is expected to close in the first quarter of 2011.

The M&A activity has been red hot for server and data storage companies this year with large players like Dell (DELL) and Hewlett-Packard (HPQ) paying steep premiums to get a foothold in the sector. After a lull, it looks like the action may have revved up again with this deal.

Staying on Top of Rapidly Changing Technology


Founded in 1997, Voltaire has become a leader in server and fabric switches. These sophisticated technologies allow for improved performance in data centers and even cloud-computing environments.

Voltaire's solutions scale according to a customer's unique needs, such as with standards like InfiniBand or 10 Gigabit Ethernet. It's complex stuff -- and the technology keeps changing. But so far, Voltaire has been able to keep up.

The company counts about 30% of the Fortune 100 as customers, including HP, IBM (IBM) and Oracle (ORCL). Voltaire's switches are embedded in these company's blade servers and other systems.

And growth has been strong. In the third quarter, revenue increased 25% to $14.4 million. The annual outlook is for revenue of $67 million to $70 million.

The company has also been showing improvement in cutting back its losses. In the quarter, the operating loss was $618,000, which compares to a loss of $1.5 million in the same period a year ago. Although, operating cash flows was $3.6 million.

Investors Are Skeptical


Despite its strong technology, the stock price of Voltaire has been erratic. Then again, the company has rivals like QLogic (QLGC), Cisco (CSCO), Juniper Networks (JNPR) and Brocade Communications Systems (BRCD).

A merger with Mellanox should give it more heft. The deal will also help with Mellanox's vision to be a leading supplier of end-to-end connectivity solutions for servers and storage.

No doubt, the market opportunity is enormous. A recent study from Gartner forecasts that global server shipments will increase from 9 million in 2010 to 11.2 million in 2014. As for the storage market, worldwide systems are expected to grow from 1.8 million in 2010 to 3.2 million in 2014.

True, investors have some skepticism of the deal as Mellanox's shares are off 4% in Monday morning trading. But the acquisition is not cheap and will take efforts at integration.

Ultimately, Mellanox will eventually itself be buyout bait, with potential suitors like IBM or Oracle. And by adding Voltaire, this may make the company even more attractive.


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