Raging Capital Urges Shareholders to Vote AGAINST Mellanox Merger and FOR Election of Ken Traub and Paul McWilliams

Exclusive Negotiations with Mellanox Did Not Lead to Full Value for Shareholders

Believes EZchip Is Worth Much More Than $25.50 -- Either By Staying an Independent Company or in a Full, Fair and Competitive Sale Process

Nov 09, 2015, 22:56 ET from Raging Capital Management, LLC

ROCKY HILL, N.J., Nov. 9, 2015 /PRNewswire/ -- Raging Capital Management, LLC ("Raging Capital"), the largest shareholder of EZchip Semiconductor Ltd. (NASDAQ: EZCH) ("EZchip"), owning approximately 6.7% of the ordinary shares outstanding, issued a letter to EZchip shareholders today urging them to vote against the merger with Mellanox Technologies, Ltd. (NASDAQ: MLNX) ("Mellanox"), and vote for the election of Raging Capital's two highly qualified director nominees, Ken Traub and Paul McWilliams

The full text of the letter follows:

November 9, 2015

Dear Fellow Shareholders:

The November 12, 2015 vote on the proposed EZchip-Mellanox merger is fast approaching.  It is extremely important that you protect your investment by voting the GOLD card AGAINST the Merger Agreement and FOR the election of Raging Capital's nominees Ken Traub and Paul McWilliams to the Company's Board of Directors. 

Voting instructions can be found at www.EZCH-value.com

As EZchip's single largest shareholder, we strongly believe that now is NOT the right time to sell EZchip.  We are confident in EZchip's future value potential as a standalone business and believe the Company is positioned to be one of the most dynamic and exciting growth opportunities in the entire semiconductor and networking technology space!   As a result, we believe there could be a much better opportunity to sell the Company for significantly more money at a later date.

As we have previously stated (along with Glass Lewis - one of the leading proxy advisory firms), the EZchip board of directors failed to run a comprehensive, fair and competitive sales process.  Instead, the Company negotiated only with its friends at Mellanox, which is based in the same small Israeli town of Yokneam as EZchip. 

In its defense of the ill-advised merger agreement with Mellanox, EZchip claims that "no interest has been indicated by any potential suitor to date."   We know this for a fact to be untrue.  We are aware of other suitors who are interested in EZchip and who have contacted EZchip and/or its banker in order to express their interest.  Unfortunately, EZchip did not enable anyone but Mellanox to get in the door.

It is important to understand that EZchip's campaign to cram through this ill-advised sale to Mellanox demonstrates that their interests may not be aligned with shareholders.  We are concerned that EZchip CEO Eli Fruchter may have been planning to retire – stating publicly after the deal was announced: "I'm sixty this year, and I think that that's enough" – but his shares are not as liquid as other shareholders, and the only way he can become liquid on his entire stake in EZchip is to sell the Company for cash.  But rather than waiting for the right time to sell when EZchip's value is more apparent, or conduct a full, fair and competitive sale process – he negotiated only with Mellanox based on a long-standing understanding between Mr. Fruchter and Mellanox CEO Eyal Waldman that they would bring the companies together. 

Considering the apparent lack of interest in seeking higher value from alternative suitors, shareholder value was compromised.  As a result of the bad deal that was struck in a shot-gun marriage, and our own challenge to the proposed merger, EZchip has resorted to publicly downplaying its own future prospects in stark contradiction to its own prior statements and the facts as we know them.  Do not be fooled by EZchip's latest tactic to downplay its promising future – we believe this sudden misdirection is solely intended to push through the merger vote. 

Here are the main problems we have with the proposed Mellanox merger:

  • EZchip only negotiated with Mellanox.  Despite a robust M&A environment, inexpensive and plentiful financing options and numerous potential bidders for EZchip, the Company's board of directors only negotiated with one potential buyer - Mellanox, and failed to run a rigorous sale process or create a competitive bidding environment.  We know of suitors that are interested in EZchip, but EZchip never gave them a chance.
  • The Board failed to include a standard "Go-Shop" provision and instead agreed to an expensive break-up fee, severely restricting the opportunity for a competitive bidding process.  The merger agreement does not include a "Go-Shop" provision, which would be standard in an abbreviated sale process like this one.  Furthermore, the break-up fee is well above industry norms at 4.9% of the deal's enterprise value. 
  • $25.50 per share is a very cheap buyout price.  $25.50 per share implies EZchip will be sold, net of cash, for just over 10x 2016 consensus earnings estimates.  This is clearly a low valuation for a company with EZchip's growth momentum, operating leverage and technology strength.  Furthermore, EZchip's current earnings are being temporarily depressed by the Company's substantial investments in the NPS and TILE-Mx products; material revenue from these investments won't occur until 2017 and beyond. 
    • When we apply a valuation similar to what PMC-Sierra is currently commanding in its sale process, we calculate a take-out price for EZchip of about $35.00 per share for the business today, but this ignores the tremendous growth potential of EZchip which justifies a much higher valuation multiple. 
    • An enormous amount of this value will be transferred to Mellanox for free.  Research firm CRT Capital estimates that this deal will be $0.80 cents per share accretive to Mellanox in the first year alone. 
    • As a standalone enterprise, we believe EZchip's stock can trade well above $25.50 per share.

What we find even more deplorable is that, in an attempt to push through this "Merger of Convenience," EZchip is now aggressively talking down the potential of the business and misleading shareholders about the integrity of the sale process and current third-party interest for EZchip.   This is why we believe it is so important to have board members with deep M&A expertise and industry knowledge advocate for shareholders in EZchip's boardroom.  Your vote FOR the election of Ken Traub and Paul McWilliams will help ensure the board is fully committed to maximizing value for shareholders.

To conclude, let's review the recent statements made by EZchip's CEO Eli Fruchter during the Company's August 2015 investor conference call BEFORE the Mellanox deal was announced:


"We believe it is important for investors to note that the NPS enables EZchip to capture significantly more customers with more use cases than previously achieved with the NP-4 or NP-5 products. We are now targeting both the carrier and data center markets, where we sell to networking equipment vendors that sell in these markets.  And we're also pursuing the white box model in which we sell directly to the carrier and data center operators that utilize the white box model. The reported design wins of Tier-1 customers demonstrates all these types of opportunities carriers and data centers sell to equipment vendor and white boxes."

"Now that there are expansion opportunities to other markets, their architecture is lacking functionality and flexibility, specifically C-program ability, layer 4-7 processing and support of a standard operating system. These NPS features are a must have for a wide range of products and applications beyond switches and routers, including network virtualization, SDN, NFV, security, network monitoring, load balancing and more. This is demonstrated through the reported NPS design wins."

"We believe emerging trends in service provider markets, such as SDN/NFV, may shift the future sourcing of networking equipment. Service providers and large data center operators could become leading merchant silicon customers as they utilize white box designs, which are forecasted to incorporate both third-party software and merchant silicon. We remain confident our unique NPS architecture will allow EZchip to remain a leading merchant silicon provider for many years to come."


"Interest in NPS remains elevated. And we are very pleased to report five Tier-1 design wins in our new target market for white boxes and data centers, as well as in our traditional carrier router markets, to commence following sample availability. Three of these reported design wins are in our new target markets, a white box with a Tier-1 carrier, a white-box with a hyper scale data center operator, and a third win with a Tier-1 data center switch vendor. Within our core networking end market, we've already reported a win with ZTE. And we now have another Tier-1 switch out vendor which brings the total to five Tier-1 wins."

NOTE: On November 5, 2015, EZchip disclosed that its NPS chip has secured design wins with two additional "tier-one data center" companies.  EZchip has now secured design wins with three tier-one data center companies; the short list of tier one data center providers includes Amazon, Google, Microsoft, Facebook, HP, IBM and Rackspace.  


"We believe our market-leading position in merchant NPU saw further gains due to changes in the competitive landscape. Marvell Semiconductor, EZchip's ASIC partner for Cisco for the NP-3, NP-4, and NP-5 product line, has recently reorganized its networking business and thus chosen to partner with EZchip for merchant NPU design needs and recommend EZchip's NPU within Marvell's current and future networking customers. This expanded relationship will provide Marvell's networking customers the best-in-breed merchant NPU product portfolio and can open up new revenue opportunities for EZchip. We believe the expanded partnership with Marvell provides further validation of EZchip's market-leading merchant NPU portfolio."


"We view the TILE-Mx as a leading multicore solution for networking and SDN/NFV opportunities. We estimate potential growth opportunities for the TILE-Mx will allow for expansion of our current multicore TAM and could be a key driver of future EZchip growth in coming years. We see the multicore market as very strategic for our growth, in particular those related to NFV and virtualization, in carrier, data center and cloud networks."

"Like the NPU market, we believe EZchip's multicore products offer strongly differentiated technology, which may allow for increasing market share in the coming years and potentially becoming a leader in the multicore CPU market. The TILE-Mx remains on track to deliver customer samples in the second half of 2016."


"With regards to the coming years, we expect the significant investments we have undertaken related to NPS and TILE-Mx to pay off, with NPS starting to contribute revenues potentially as early as 2016 and TILE-Mx revenue contribution currently expected to begin in 2017. Given the majority of investment in NPS and TILE-Mx are already included in current OpEx level, we do not expect OpEx to increase substantially in the coming years resulting in improved operating margins."

In our view, EZchip is in the right place at the right time with leading-edge technology.  Cloud computing is exploding and we are only in the early stages of massive growth associated with white box networking, network function virtualization and software-defined networking.  The NPS-400 is a unique and powerful Layers 2-7 chip targeting these opportunities.  In essence, EZchip is positioned to "hollow out" the router in a revolutionary way that competitors cannot match.  The Company's recent design wins confirm this reality.

Now is not the time to sell EZchip for $25.50 per share!  We believe the risk/reward is stacked heavily in favor of shareholders and the significant upside value potential of EZchip can only be realized if shareholders vote down the transaction.  We are excited about EZchip's future potential and we strongly encourage fellow shareholders to vote against the EZchip-Mellanox merger.

The Annual General Meeting of Shareholders of EZchip, scheduled to be held on November 12, 2015, is fast approaching.  Raging Capital is urging all shareholders to vote to reject the merger and to elect its two highly-qualified director nominees – Paul K. McWilliams and Kenneth H. Traub – in an effort to prevent a value-destructive transaction and to help protect the interests of shareholders.  

Instructions on how shareholders can vote AGAINST the merger and vote FOR Raging Capital's two highly-qualified director nominees can be found at www.EZCH-value.com.

Please sign, date and return the GOLD proxy card today. 


William C. Martin Chairman and Chief Investment Officer Raging Capital Management, LLC


Tell your Board what you think!  Your vote is important.  No matter how many Ordinary Shares you own, please give Raging Capital your proxy AGAINST the Merger and FOR the election of its two highly-qualified nominees by taking three steps:

  • SIGNING the GOLD proxy card,
  • DATING the GOLD proxy card, and
  • MAILING the GOLD proxy card TODAY in the envelope provided (no postage is required if mailed in the United States).

If any of your Ordinary Shares are held in the name of a brokerage firm, bank, bank nominee or other institution, only it can vote such shares and only upon receipt of your specific instructions.  Depending upon your broker or custodian, you may be able to vote either by toll-free telephone or by the Internet.  Please refer to the proxy card for instructions on how to vote electronically.  You may also vote by signing, dating and returning the GOLD proxy card.

If you have any questions or require any additional information concerning Raging Capital's solicitation, please contact Okapi Partners at the address set forth below.

OKAPI PARTNERS 1212 Madison Avenue, 24th Floor New York, N.Y. 10036 (212) 297-0720 US: (855) 208-8902    Israel: 01801227249 E-mail: info@okapipartners.com

Media Contact:

Hedge Fund Solutions, LLC Damien Park, 215-325-0514

Investor Contact:

Okapi Partners LLC Bruce Goldfarb, 212-297-0722, Chuck Garske, 212-297-0724 or Lydia Mulyk, 212-297-0725

SOURCE Raging Capital Management, LLC