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Interview

A Public Company Owes it to its Shareholders to Consider all Options, Says Mellanox CEO

Mellanox co-founder and CEO Eyal Waldman spoke to Calcalist about the Nvidia deal, the struggle with activist hedge fund Starboard, and his business philosophy

Meir Orbach and Diana Bahur-Nir 12:2929.09.19

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No matter how you slice it, the $6.9 billion acquisition of Israeli chipmaker Mellanox Technologies Ltd. by Nvidia Corp. is the deal of 2019. Beyond being Nvidia’s most expensive acquisition to date, it offered a 17% premium on Mellanox’s market capitalization at the time, and is the second largest exit in Israeli history, surpassed only by Intel Corp.’s $15.3 billion acquisition of automotive chipmaker Mobileye two years prior.

It is also an impressive second exit for CEO and co-founder Eyal Waldman, who owns 3.6% of Mellanox and is expected to receive NIS 905 million (almost $260 million) for his stake. The sale is bittersweet, though, as it also represents a missed opportunity to grow a giant local company like Nasdaq-listed network and cloud security provider Check Point Software Technologies Ltd. Though Waldman is at peace with the decision, he is also aware of what could have been.

Eyal Waldman. Photo: Orel Cohen

Mellanox has enormous potential. Didn’t you dream of turning it into an Israeli giant and a world leader?

Mellanox is already quite large—we have made acquisitions for a total sum of $1.1 billion in cash to date. Of the nine companies acquired we have only closed one, so we did quite alright. Our sales should have reached around $1.3 billion this year, so had we remained independent we probably would have become a very large Israeli company. That was the dream, but when you are a public company you need to consider what is best for your shareholders. You need to consider risk and chance. Some companies refuse offers and then crash and burn.

There is always the worry of making a wrong decision, but the deal was the right thing for the shareholders, the company, and the employees. Yesterday, I was sitting with people who said they came from low income families and Mellanox helped them buy a house. You can’t reject offers because of a dream and because you yourself have no financial concerns. Taking risks is easy, but the shareholders and employees must come first.

Nvidia’s offer was good, but not far from the valuation Mellanox had already achieved. Couldn’t you have told shareholders to hang on, that there was another $7 billion around the corner?

You are forgetting that six months prior, we had an offer that valued the company at $46 per share. Let’s put emotions and ambitions to the side for a minute—if you are a shareholder and the CEO tells you he has a no-risk offer of $125 per share, I don’t think you can logically reject it, speaking from a financial point of view. It is a price point Mellanox was never close to.

In 2002, Before your Nasdaq IPO, you said that selling was always an option, but building something long-term is much harder, and will have better returns.

I have not changed my mind. Building an independent company that reaches billions of dollars in annual sales is very hard, and Israel has few companies that managed that, no more than 10. But as I said, once you are a public company you need to do right by your shareholders, even if emotionally you are leaning in the other direction. From a business point it is a very good outcome.

What about a scenario where Mellanox grows and buys Nvidia?

Nvidia was founded six years before Mellanox. The deal was the culmination of a series of events.

Was the start of that series the struggle with activist hedge fund Starboard Value LP?

The sale to Nvidia was unrelated to Starboard, it came about after. Few companies can overcome activists like Starboard like Mellanox did. They had some dirty tricks up their sleeve and it was our win—I don’t want to say it was a knockout but there was a big disparity. They didn’t manage to get one of their candidates on the board, they didn’t manage to get rid of the chairman and CEO, or to sell us to another company, despite pitching the entire world.

Do they take the Trojan horse approach?

They always try to drive a wedge between the management and the board, but we succeeded in keeping the board united. It had disagreements, but that’s fine. If the board was worried, it would have supported Starboard. The board stayed because its members thought it was right for the shareholders and the company.

You need a lot of energy to keep managing daily operations while at the same time helming such a battle. Did Starboard wear you down?

It was a hard and traumatic experience, but it didn’t hurt my energy. The story with Starboard was in 2018, and we’ve seen good growth in 2019. Mellanox operated amazingly during the struggle, and that is what saved us—we kept running the company very well while at the same time handling that battle 22 hours out of 24. Then there was another company unrelated to Starboard that decided we were very attractive, and offers just started to come in. And as a public company, you need to consider those offers. So the process ended with the Nvidia deal without any relation to Starboard.

Waiting for China

Before any champagne bottles are popped, it is important to note that the deal has not been completed yet. Nvidia stated it will be finalized by the end of 2019, or the first quarter of 2020 at the latest. The main stumbling block is the Chinese regulators, who have yet to approve it.

While people involved say it is a routine matter, the U.S.-China trade war does have casualties. It is likely the deal will come to pass, but many people will be unsurprised if China decides to delay approval—which could lead to cancellation.

Is there any chance China will cost you the deal?

We are preparing for both outcomes: that we remain an independent company, and that we become part of Nvidia. Even if the deal doesn’t happen we will remain strategic partners. There is always a chance it won’t happen, look the the Qualcomm-NXP deal. In our case, shareholders in the U.S. and Mexico signed off, and we are waiting for European and Chinese approval. I believe it will happen by the end of the year. If it isn’t greenlit during the second half of 2020, then the odds of the deal being completed will be lower, in my opinion.

Currently, I am free to do what is right for the company. I need to work with Nvidia CEO Jensen Huang and get his agreement, but in the meantime we continue to grow and accumulate money in the bank. I can make acquisitions if Jensen signs off on them, there are sums about which we have made decisions, but from a strategic point of view I can do what I want.

When you sell a company, you want it to go to a good home and continue to grow. When a company has a not so good acquisition record, the concern is not just over the money but over the team as well. In that sense, Nvidia is exceptional—a very tech-oriented, fast-growing company, still helmed by its founder. I think the power Mellanox brings to Nvidia is immense. The synergy makes it a much stronger company.

What will the merger look like?

Mellanox will operate as a division under Nvidia, and continue to do what it does today—also continuing to grow in Israel. There will be more technological building blocks shared between both companies, and we will create synergistic things that integrate Mellanox and Nvidia.

Whether the deal is approved by the Chinese or not, how long will you stay at Mellanox for?

As long as it takes. I want it to work.

At Mellanox it was just you. At Nvidia Huang will hold a higher position.

In some ways, it is easier when the onus isn’t on you. Jensen and I will decide my future in the company together.

Will leaving be difficult for you?

It is not like leaving for a different continent. You stay close, stay in touch. Mellanox is a company with an amazing team, a healthy company that keeps growing. I give people a lot of freedom to lead.

You have recently leased a 300-square-meter space in Jerusalem's tech park, where you plan to establish another Israeli development center. Are there more plans for local expansion?

We will continue to grow, and we will do much more. You don’t just go for what is the least expensive, you need productivity, creativity, you need to understand where your talent is. In terms of a return on investment, you need to see what you are getting back. We can set up a center in India but I think the results will not be as good.

There will not be another company

Waldman, 59, was born in Jerusalem and grew up in central Israeli town Rehovot, where his parents studied for advanced degrees at the Faculty of Agriculture, Food and Environment. Waldman started out his own academic path studying chemical and civil engineering at Israeli research university the Technion Israel Institute of Technology, but switched to computer science and went on to receive a master’s in electrical engineering.

He worked at Elbit Systems Ltd. and Intel, and in 1993 was one of the founders of Galileo Technologies Ltd., sold to Marvell Technology Group Ltd. in 2001 for $2.7 billion. Galileo went public in 1997, and Waldman relocated to the U.S. a year later. In February 1999 he left Galileo, where he was vice president of engineering, and co-founded Mellanox. The company is headquartered in Israeli northern town Yokneam Illit, and it has five Israeli development centers, with a sixth currently planned for Jerusalem.

Your exit brings to mind Gil Shwed and Check Point.

Gil and I are good friends. He is a conservative, defensive person, one of the smartest people I have ever met, with a very realistic perspective. He can analyze the situation from a bird’s view. I am more aggressive and emotional, with Gil everything is very methodical. Those are two styles, one isn’t preferable to the other. He has excellent success with his method, and I think we get by pretty well as well. He is one of the people whose advice I most value.

How did you feel when you realized Mellanox was being acquired? Was it a burden off your shoulders?

It is not the end of the world for me. It gives me free time to do other things. It is also somewhat of an achievement, to leave a company at its peak.

What will you do the day after?

This is already my second company. The odds of having two successful companies are small. Not many people founded two companies and listed both: selling is a bit easier. So establishing a third company is not in my plans right now. On the other hand, I never say never because I know myself. I did not mean to do it again after Galileo, but I was bored and thought I’d maybe take a stab at something. At the moment, I am not planning anything new.

You could have lived the good life after your first exit with Galileo. You are divorced, have a luxury apartment in tel Aviv, have photogenic extreme sports hobbies.

I don’t work for the money, I enjoy the challenge: I’ll always do something, not just hang out at the beach. Happiness and wealth are not interchangeable. I wasn’t any less happy when I had an old car and we camped on the beach with tents. Sometimes it even alleviates some worries. The most important thing is that your family is happy and healthy, then that you have friends, and only then it is about what you do with your life. When you fill life with things that have a meaning and are important to you, you can be happy. Some wealthy people always feel like people seek their company to take advantage of their money, they live life constantly feeling they are going to lose.