The Israel firm in high demand, Mellanox

By Simon Griver, November 22, 2012
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Mellanox's Eyal Waldman

Mellanox's Eyal Waldman

Tel Aviv capital market veterans will do well to remember an Israeli high-tech firm with as high expectations as Mellanox. The company, which offers a choice of fast interconnect products: adapters, switches, software and silicon that accelerate application runtime, has seen its value soar over the past two years. In 2010, US computer hardware giant Oracle reportedly offered $1 billion to buy Mellanox, after purchasing 10 per cent of the company’s shares. This summer, rumours were rife that Oracle had come back with a $6 billion offer, a premium of 30 per cent on the company’s share price.

Asked whether the rumours were true, Mellanox founder and chief executive Eyal Waldman says: “We do not comment on specific rumours but I can say that there has been interest in the company. However, we feel that it is in the best interests of our shareholders to grow Mellanox as an independent company.”
Such a response is likely to be welcomed by many Israelis, who believe that Israeli start-ups have a tendency to sell-out too soon, with high-tech entrepreneurs eager to accept the first offer that comes along.
Mr Waldman says: “I don’t want to criticise anybody. I understand why people sell their businesses. You set up a start-up and you work very hard for seven or eight years and then somebody comes along with a very good offer, and you think: ‘Why not?’ It’s great for the individuals involved but it doesn’t do very much for the Israeli economy.”

This is not the first time that Mr Waldman has faced the dilemma of whether to sell a company or maintain its independence. Born in Jerusalem, and a graduate of the Technion, he worked for Intel for four years before co-founding Galileo Technology in 1994, which produced computer switches and hubs.
But in 1999, he had a high-profile falling out with its fellow founders. He says: “I think the media have exaggerated what happened for there was no real bad blood. But there was a difference of opinion and I had wanted to grow the company while my colleagues wanted to sell.”
Mr Waldman left Galileo and set up Mellanox the same year. Galileo was sold the following year to Marvell for $2.8 billion.

Yet Mr Waldman has never looked back. After raising $89 million from venture capital funds, the company went public on Nasdaq and the Tel Aviv Stock Exchange in 2007, raising $102 million at a company value of $500 million.

Investors purchasing Mellanox shares at the IPO saw their money increase nearly tenfold in just five years. Mellanox’s share price had risen nearly 600 per cent over the past two years and more than doubled during 2012. However, the share slipped back nearly 50 per cent last month after the company lowered the sales forecast for the fourth quarter of 2011, but Mellanox has clawed back much of these losses and Mr Waldman describes the fall in the share as a “market overreaction” and predicts a return to sales growth next quarter.
Most analysts still feel the share price can only move upwards. Sales of the company, based in Yokneam near Haifa, are expected to reach $525 million this year, up from $259 million last year, and $155 million in 2010.
Unsurprising then that Mr Waldman oozes confidence. He says: “I’ve always said we can reach $1 billion in annual sales and we will get there. We operate in an annual market of $5 billion going up to $7 billion in the coming years, so we can grow organically. We should be able to grow sales rapidly until $2.5 billion annually, after that it might be more difficult.”

Mr Waldman’s belief comes from the fact that in the age of cloud computing and increasing storage requirements, as well as ever larger super computers and larger data, there is a huge appetite for connectivity products that enable more data to be transferred more quickly. Mellanox’s InfiniBand chips, adapters and switches are considered to be way ahead of their rivals, particularly in terms of speed.

Intel has positioned itself as Mellanox’s closest competitor after buying Infiniband developer, QLogic earlier this year. Mr Waldman says: “Of course I’m scared. But I don’t think QLogic was very successful with their InfiniBand business, and it’s going to take Intel three or four years to catch us up.”
By then Mellanox would hope to have a new generation of products, leaving Intel to play catch-up again.
Mr Waldman, 52, is divorced with three children. He has become something of a celebrity in Israel over the past year. He is admired as a local “high-tech David” who has successfully taken on the US technology Goliaths. Such a status means that when he buys an apartment in Tel Aviv’s prestigious Meier on Rothschild Tower for £3 million, it makes headlines.

“It doesn’t bother me that people recognise me and come up to say hi,” he says in his phlegmatic tone.
Mr Waldman, a generous Technion donor, believes that there are the ideas in Israel to produce a future giant like Google or Facebook.
“Those companies began in the universities and Israel’s universities can produce a new giant.”
But does Mellanox have the potential to become a giant, or at least equal the achievements of Teva Pharmaceuticals, Israel’s biggest company with annual sales of $20 billion?
“$20 billion annual revenue is a long way to go. We certainly aren’t going to get there in just three or four years and I’m not looking ahead further than that.”

    Last updated: 8:43am, November 22 2012