Nvidia's dance with an activist hedge fund: An excerpt from Tae Kim's new book
Nvidia had a healthy balance sheet, with $3 billion in cash, but its growth was slow.
Nvidia’s work with the activist hedge fund Starboard Value helped them make key changes, leading to the successful acquisition of Mellanox, boosting AI and networking.
In early 2013, Nvidia, a well-known technology company, faced challenges. The stock price had been stuck for four years, and their profits were mixed. Although sales grew by 7% from the previous year, profits dropped by 2%.
Nvidia had a healthy balance sheet, with $3 billion in cash, but its growth was slow. This led to a low price-to-earnings (P/E) ratio of just 14 times earnings. Investors, like the activist hedge fund Starboard Value, saw an opportunity. They thought Nvidia’s stock was underpriced and that the company had room to grow.
In mid-2013, Starboard bought $62 million worth of Nvidia shares, about 4.4 million in total. At the time, some Nvidia executives were nervous. They feared Starboard might push for big changes, like reorganizing the company or reducing investments in its important technologies, like CUDA (a system Nvidia uses for powerful graphics processing).
However, the relationship between Nvidia and Starboard stayed civil. A senior Nvidia executive said it never reached a crisis point. Starboard mainly pushed for Nvidia to buy back some of its stock to boost its value.
By November 2013, Nvidia announced it would buy back $1 billion worth of stock by fiscal 2015. Later, they added another $1 billion buyback. The stock price surged by 20% shortly after. Starboard sold their shares by March the following year, making a good return.
Though their time together was short, Starboard’s advice helped Nvidia improve its strategy, and Starboard was impressed by Jensen Huang, Nvidia’s CEO.
But that wasn’t the end of Starboard’s influence. In 2017, Starboard bought 11% of Mellanox Technologies, a company that made high-speed networking products for data centers. Mellanox had strong growth, but its profit margins were low due to high research costs.
Starboard believed that Mellanox’s performance wasn’t good enough, especially since the semiconductor industry was growing fast. In 2018, Starboard pushed for Mellanox to make changes, or it could be sold. They reached an agreement that gave Starboard power over Mellanox’s future.
In 2018, Mellanox received a purchase offer from a competitor. Jensen Huang saw the opportunity and quickly decided Nvidia needed to buy Mellanox. Nvidia entered a bidding war with Intel and Xilinx. After months of back-and-forth, Nvidia won with an offer of $6.9 billion in March 2019.
Jensen believed that Mellanox’s networking technology was crucial for Nvidia’s future in high-performance computing. As data centers grew, they would need fast and reliable connections. Mellanox’s InfiniBand technology was key to making that happen. Jensen’s vision turned out to be correct.
By 2024, the former Mellanox business was bringing in $3.2 billion in quarterly revenue, growing by over seven times since Nvidia acquired it. The once-small company now helped power Nvidia’s dominance in the AI industry.
In fact, InfiniBand’s technology is still crucial today for many companies that rely on Nvidia’s products. Brian Venturo, a top executive at CoreWeave, a cloud computing provider, said InfiniBand’s ability to minimize delays and make workloads run more efficiently is unmatched.
Looking back, Nvidia’s acquisition of Mellanox turned out to be a brilliant move. Starboard helped guide Nvidia, but Jensen and his team recognized the importance of Mellanox and pursued it aggressively.
As a senior Nvidia executive put it, “Mellanox was a wonderful thing thrown in our lap by activists.” It was a key piece in Nvidia’s rise to become a leader in AI.
In the end, Jeff Smith of Starboard Value admitted, “We never should have exited the position.”
