Why Is NVIDIA Buying Mellanox?

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By: R. Scott Raynovich

On Monday, NVDIA (NVDA) announced it had reached an agreement with Mellanox to acquire all of Mellanox's (MLNX) outstanding shares for $125 per share in case, or an approximate value of $6.9 billion. The deal add to NVDIA's considerable strength in supplying specialized chips for high-performance computing (HPC) applications, including those in the cloud.

The premium paid was about 8% above Mellanox's market price on Friday, giving a big boost to investors. A statement from NVDIA says the deal "unites leaders in processing and interconnect for the high performance computing market." NVDIA expects the deal to be accretive to NVIDIA’s non-GAAP gross margin and free cash flow immediately after close. NVDIA's share price also rose on the deal.

SmartNICs for the Cloud

Mellanox has technology roots in Israel but is headquartered in Sunnyvale, Calif. It makes specialized chips and network interface cards (NICs) -- often referred to SmartNICs -- that can speed up the processing of networks handling large amounts of data. These techniques will become more important as large, distributed cloud applications -- including artificial intelligence (AI) and machine learning -- take over the world.

This deal is likely a harbinger of more deals pursuing specialized processing for HPC. NVDIA rose to power by leveraging its graphics processing units (GPU), which could offload processing power from central processing units. Likewise, Mellanox uses techniques in its SmartNICs, which offload processing power from CPUs in cloud data centers.

Recent Futuriom research shows that data-center architects and managers embrace this approach, because it enables them to optimize the performance of a data center without adding additional server hardware. The rise of data-heavy apps such as AI and analytics, as well as large distributed cloud systems, is likely to increase the pressure to optimize data centers for high performance.

Cloud data-center end users see many potential benefits in upgrading the network for DCs. These benefits include faster application performance (64%), stronger security (59%), greater flexibility (57%), and application reliability (57%), according to Futuriom research. (Disclosure: Mellanox is a research client of Futuriom's. You can download the entire report, the "Untold Secrets of Data-center Efficiency," from the Mellanox website.)

In other words, end-users see many benefits of using specialized chips to increased the firepower of the cloud. For example, in addition to potential increasing application performance, SmartNICs can enable better security with security analytics programs that can examine packet activity to see what's happening on the network.

A More Powerful Cloud

The techniques of cloud data centers are now migrating to the enterprise, where distributed applications now rule. But what does all this mean for the network? It means that there’s more pressure than ever for networks to perform, and new technologies need to be deployed to make sure that networks don’t become the bottleneck for the cloud. The network, it turns out, is crucial to supporting the data-center infrastructure that must be built to support compute and storage for new applications.

This deal is a blow to Intel (INTC), which was also reported to be bidding for Mellanox, as it will boost NVDIA's competitive position for cloud computing. But the story is not over. Other specialized network chip companies, including Xilinx (XLNX), have also been rising on these new approaches. Expect continued interest in specialized processors that can be used to speed up cloud and private data centers.