U.S. chipmaker Nvidia has agreed to buy Israeli chip designer Mellanox Technologies for US$6.8 billion, beating rival Intel in a deal that would help the firm boost its data centre and supercomputer business.
The all-cash offer of US$125 per share represents a premium of 14 per cent to Mellanox's closing price on Friday.
Mellanox shares rose 8.4 per cent to US$118.56 and Nvidia shares gained 2.8 per cent in early Nasdaq trading on Monday.
The agreement, which the companies described as "definitive", follows a competitive bidding process which according to sources familiar with the matter, included rival chipmakers such as Intel. Xilinx was also part of the process, sources said.
Mellanox will pay a US$350 million termination fee to Nvidia if it accepts a rival offer.
Intel declined to comment on whether the company had bid for Mellanox, while Xilinx did not immediately respond to a request for comment.
"The emergence of AI (artificial intelligence) and data science, as well as billions of simultaneous computer users, is fuelling sky-rocketing demand on the world’s data centres," said Nvidia CEO Jensen Hung.
Bernstein analyst Stacy Rasgon said Nvidia has been pushing more into networking and connectivity with its own tailored solutions and Mellanox would bring further expertise.
"But going out and buying an asset right now, immediately after the recent spate of guide downs may raise a few eyebrows," Rasgon added. "It will probably spark questions as to whether Nvidia sees anything changing regarding the growth trajectory of their core data centre business."
Nvidia management comments on a conference call that discussions to buy Mellanox were relatively recent suggested that they may have calculated that Mellanox as part of Intel would have hindered Nvidia’s long-term growth, Rosenblatt Securities analyst Hans Mosesmann said.
Mellanox makes chips and other hardware for data centre servers that power cloud computing. The company had a market capitalisation of about US$5.9 billion at the end of trading on Friday.
Nvidia cut its fourth-quarter revenue estimate by half a billion dollars in January because of weak demand for its gaming chips in China and lower-than-expected data centre sales.
"We're not changing our guidance that we just provided about a month ago for the current fiscal year," Nvidia CFO Colette Kress told the conference call.
Data centre revenue accounts for nearly a third of Nvidia's sales. The chipmaker has grown at a rapid pace in the past few years under Huang, but a slowdown in China and a fading cryptocurrency craze have started to weigh on its sales in recent quarters.
It is expected to close by the end of 2019. It could, however, face some regulatory hurdles in China, where Mellanox has major customers such as Alibaba and Baidu.
In the wake of its trade row with the United States, China has previously moved to thwart non-Chinese chip M&A deals.
Analysts believe Intel would have faced even greater challenges as it and Mellanox were dominant suppliers of InfiniBand technology, a networking standard commonly used in supercomputers.
The agreement is a win for New York-based activist investor Starboard Value LP, which owns 5.8 per cent of Mellanox and reached a deal with it last year over the composition of its board.
(Additional reporting by Tova Cohen in Tel Aviv, Steven Scheer in Jerusalem, Stephen Nellis in San Francisco and Supantha Mukherjee in Bengaluru; Editing by Arun Koyyur and Emelia Sithole-Matarise)