Cont'd.
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:
NPS EXPANDS ADDRESSABLE MARKET AND WILL DIVERSIFY CUSTOMER BASE
"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."
NPS INTEREST IS ELEVATED, SIGNIFICANT TIER-ONE DESIGN WINS
"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.
MARVELL EXITS NPU MARKET, INSTEAD PARTNERS WITH EZCHIP – CREATES NEW REVENUE OPPORTUNITIES
"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."
TILE-Mx MULTI-CORE CHIP STRONGLY DIFFERENTIATED, FUTURE GROWTH DRIVER
"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."
UPFRONT INVESTMENTS ALREADY MADE, SIGNIFICANT FUTURE OPERATING LEVERAGE
"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.
Sincerely,
William C. Martin
Chairman and Chief Investment Officer
Raging Capital Management, LLC
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