Mellanox closes Silicon Photonics Design in the US
11 January, 2018
One day after a disturbing letter from its biggest shareholder, Starboard Value, Mellanox closed its Silicon Photonics center in the US. What will be the next move in the coming power struggle?
One day following a public letter of the activist fund Starboard Value to Mellanx’es board and the CEO Eyal Waldman about the company’s “poor performance”, Mellanox Technologies, Ltd. (NASDAQ: MLNX), announced that it discontinues its 1550nm silicon photonics development activities in the US, effective immediately. It is not yet clear what is the connection between the two events, but it raises questions.
“We began our review of the silicon photonics business in May of 2017, but as the business did not become accretive as we had hoped, we decided to discontinue our 1550nm Silicon Photonics development activities,” said Eyal Waldman, president and CEO of Mellanox Technologies. The discontinuation will save $26 million to $28 million in operating expense. The action will bring a reduction in force of about 100 people in the US, and an estimated aggregate charge of $21 million to $24 million.
End of a $82 Million Acquisition
The development center have joined Mellanox in June 2013, following the acquisition of Kotura from SUNNYVALE, CA, for approximately $82 million in cash. Kotura developed advanced silicon photonics optical interconnect technology for high-speed networking applications. With over 120 granted or pending patents in CMOS photonics and packaging design, Kotura has made a number of ground breaking innovations in optical interconnects by integrating multiple high speed active and passive optical functions onto a silicon chip. Mellanox said this week that it intends to retain this intellectual property.
Mellanox Technologies from Yokneam, Israel, supplies of end-to-end connectivity solutions for servers and storage that optimize data center performance, Including InfiniBand Solutions for high performance computer and Gigabit Ethernet cards. Today, the company is facing major challenge, following the November 2017 acquisition of 10.7% of its shares by Starboard Value from New York.
An open Warning Letter
Earlier this week, Peter Feld, Managing Member at Starboard Value LP, sent an open letter to Waldman and the board of directors of Mellanox, complaining that “Mellanox has been one of the worst performing semiconductor companies for an extended period of time. The Company dramatically underperformed the peer group and the broader semiconductor industry over the past 1, 3, and 5 years.”
In the end of the letter, Feld writes: “Starboard has a long and successful history of working with companies in the semiconductor industry to drive significant value creation for the benefit of all shareholders. We believe there is a tremendous opportunity at Mellanox, but it will require substantial change.” This is not a new strategy: many times in the past, Starboard tried the take over the board and re-shuffle companies after it had quietly acquired approximately 10% of their common shares.
History of Power Struggles
During the first half of 2012, for example, Starboard quietly collected common stocks of DSPG and when it had fetched approximately 9% of the stocks, it demanded control over the board in order to redirect the company to new policy: stopping R&D investments in new products, cutting engineering overhead and focus on sales of current products. This is the same strategy Starboard implemented when it took over MIPS (that was sold to Imagination) and Zoran (that was sold to CSR). Did the discontinuation of the Amrican Silicon Photonics business is a quiet answer to Starboard? The answer lay on the next moves of the fund and of Mellanox itself.