Nvidia's (NVDA) latest acquisition still needs a key sign-off in China. That could prove problematic given the recent political posturing of President Trump.
CEO Jensen Huang made a big bet on the future of datacenters with a $6.9 billion splash for Mellanox Technologies (MLNX) earlier this year, noting the importance of diversifying the gaming-heavy revenue base of the company, which has been susceptible to volatility amidst crypto use cases.
"The emergence of AI and data science, as well as billions of simultaneous computer users, is fueling skyrocketing demand on the world's datacenters," Huang said of the deal in March. "Addressing this demand will require holistic architectures that connect vast numbers of fast computing nodes over intelligent networking fabrics to form a giant datacenter-scale compute engine."
"We believe that there will be opportunities to cross-sell and enhance our broader solution set over time given each company's technology assets and customer bases in high-performance computing, enterprise and hyperscale," said CFO Colette Kress in a conference call elaborating on the deal's rationale.
Despite near term headwinds noted by Intel (INTC) in datacenter, many recognize that datacenters will be a long-term drier of growth for semiconductor companies and as such will be a vital area to attack for Nvidia. Mellanox gives Nvidia a much needed edge in this segment.
While the idea of a deal is largely welcomed by Nvidia and bullish analysts covering the stock, it might not receive a warm welcome in China.
The national regulators will most likely be worried about consolidation of technology suppliers that would have outsized control over these next generation technologies. Considering the Chinese government itself is a massive customer, there remains reason to doubt the deal.
Problematic Precedents
The remaining regulatory hurdle is reminiscent of recently stalled blockbuster deals, including Qualcomm's (QCOM) attempted takeover of NXP Semiconductors (NXPI) which failed in China, and Broadcom's (AVGO) hostile coup on Qualcomm that was stalled by U.S. rulings.
Both deals were killed by combatants in the ongoing trade war for their implied impact on national security and violations of antitrust regulations as the trade war tit for tat built to a fever pitch in 2018.
Qualcomm's bid for NXP was also rumored to be a casualty of the trade barrier battle, coming in response to bans on Chinese smartphone producer ZTE (ZTCOY) . It is worth noting that Chinese officials rejected this theory and affirmed that the rejection related to antitrust laws.
President Xi also said he would reconsider the Qualcomm deal for NXP if it were refiled.
Nonetheless, the resurgence of trade concerns come at an inopportune time for Nvidia as it fields shareholder lawsuits domestically and continues to await Chinese regulatory approval.
"Our two companies are complementary, and we build computers, we don't build communications systems," Huang told CNBC in March. "The nature of the work that we do is very different."
He added that the innovation available by capitalizing on synergies between the two companies should not only be welcomed by consumers, but by governments and regulators as well.
Whether or not Chinese regulators see it that way remains to be seen, but the "trumped up" trade situation isn't exactly encouraging.
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