Activist Raging Capital Management has bowed out of its campaign at EZchip Semiconductor (EZCH) and declared support for the chipmaker's marriage with Mellanox Technologies (MLNX) - Get Mellanox Technologies, Ltd. Report .
Rocky Hill, N.J.-based Raging Capital announced late Wednesday it supports EZchip's proposed merger with Mellanox more than three months after it launched its campaign arguing the offer of $811 million, or $25.50 per share, undervalued the target company. The Israeli chipmakers initially announced the merger in September.
"It's pretty clear that the management wanted to do the deal whether or not it was the best deal for investors," said a source familiar with the situation who asked for anonymity. The source asserted that while other shareholders also believed that EZchip was undervalued, Raging Capital essentially decided the battle wasn't worth the effort required.
"The reality is that the company would fight for this very hard," the source said. "If you don't have a management team who wants to run the company, it's hard to realize value from that team." This person further argued that the Israeli shareholding system also isn't as favorable to achieving maximum value as the U.S. system is.
Since initially disclosing its 6.5% stake in October, Raging Capital has asserted the $25.50-per-share price doesn't reflect the value of EZchip's new products nor does it consider the company's growth potential in the network processing chip industry following Broadcom's exit from the segment. It also questioned whether EZchip had ran a robust auction.
Raging Capital scored a partial victory at the Nov. 12 annual meeting when EZchip postponed the vote on the pending merger with Mellanox Technologies and added amendments to the transaction that included a 30-day go-shop period. However, the activist's two nominees, Paul McWilliams and Kenneth Traub, weren't voted to the board at the meeting.
Even during the go-shop, the activist raised red flags at EZchip, questioning whether the target was committed to fully and comprehensively running the process. Meanwhile, EZchip revealed last month that it reached out to 31 strategics during the go-shop but received no counter bids.
A second source familiar with the matter argued that EZchip always favored Mellanox and that management's interest in the company would fade if the deal got voted down. Raging Capital decided it was time to "move on" after considering all the factors, this person suggested.
In fact, the investor is still making profit. It bought EZchip shares in August when they were trading at between $19.99 and $22.63 per share, according to Raging Capital's original 13D filing dated Oct. 14.
"For Mellanox, the strategic rationale has never changed. It engines them into the networking space," Daniel Amir, managing director of equity research at Ladenburg Thalmann Financial Services. Amir added that EZchip's technology perspective is particularly valuable at the price the bidder is offering, noting that Mellanox is getting "a very good deal."
Meanwhile, Mellanox appears close to grabbing EZchip at a time when the market has been rapidly consolidating. Last year was a record year for semiconductor companies on the M&A front with such mega-deals as Intel's (INTC) - Get Intel Corporation Report $17 billion purchase of Altera and Avago Technologies' (AVGO) - Get Broadcom Inc. Report $37 billion acquisition of Broadcom.
"Consolidation in 2015 is likely to continue in 2016," Amir said. "The approach is the same: You need to consolidate in order to compete."
Shares of Mellanox rose to $40 recently, giving it a market capitalization around $1.85 billion. Shares of EZchip are up to $25.21, giving it a $738.88 million market cap.
Officials with EZchip and Mellanox declined requests to comment.