Nvidia signals data centre push after Mellanox buy

Nvidia has agreed to buy Israeli chip designer Mellanox for US$6.8 billion, beating rival Intel in a deal that would help the firm boost its data centre and artificial intelligence business.

Nvidia is best known as a GPU vendor. So why does Mellanox, a maker of data centre networking product, make sense?

"We want to double down on data centres," Nvidia chief executive Jensen Huang told Reuters in an interview.

Today Nvidia gets about a quarter of its revenue from data centres, with the US$2.9 billion in sales in 2018 from the segment growing 52 percent year over year. The segment is important as a slowdown in China and a fading cryptocurrency craze have started to weigh on Nvidia's overall sales in recent quarters.

Nvidia said it believes the combined market it can target with Mellanox aboard is worth about US$60 billion: US$50 billion for Nvidia's computing chips and US$11 billion for Mellanox's high-speed networking chips.

The tie-up also builds on efforts at Nvidia and Mellanox to get out of the cutthroat business of selling chips and into the more profitable business of selling complete systems, said Bob Wheeler, a principal analyst at chip research firm The Linley Group.

That means the deal is also about Intel, which dominates data centre CPUs with its Xeon range and then sells adjacent products like memory and networking. Nvidia now has a way to sell more than just GPUs and can step up to defining the networks businesses use to put them to work.

Timing

The deal follows a competitive bidding process which according to sources familiar with the matter, included rival chipmakers such as Intel and Xilinx. Mellanox will pay a US$350 million termination fee to Nvidia if it accepts a rival offer.

The deal 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.

Chinese regulators may require Nvidia to promise that Mellanox's technology will continue to work with chips from other makers, said Aaron Glick, an analyst with Cowen.

"They're in the networking business, and networks are interoperable. We're going to keep it interoperable," Nvidia's CEO told Reuters in response to questions about regulatory approvals. "Both of our companies are focused on high performance computing, but neither of our companies have a giant position."

(Additional reporting by Tova Cohen in Tel Aviv, Steven Scheer in Jerusalem, Stephen Nellis in San Francisco, Liana Baker in New York and Supantha Mukherjee in Bengaluru; Editing by Emelia Sithole-Matarise and Phil Berlowitz)