By Steven Scheer
JERUSALEM (Reuters) - Israeli chip maker Mellanox Technologies saw its shares surge on the Nasdaq on Tuesday after activist hedge fund Starboard Value LP bought a 10.7 percent stake to influence strategy.
Starboard became the biggest shareholder in Mellanox after disclosing its stake purchase - valued at around $300 million - and said the chipmaker could improve its financial performance.
"Tremendous value can be created through operational improvements or other strategic alternatives," Starboard said in a filing with the U.S. Securities and Exchange Commission late on Monday.
There was a "growing disparity" between the chipmaker's margins, growth and stock price performance compared to its peer group, Starboard said.
In particular, Starboard is concerned that Mellanox, which makes computer networking products using InfiniBand and Ethernet technology, rejected a potential merger with rival Marvell Technology. Starboard, in its filing, said Marvell had expressed interest in discussing a "potential strategic transaction" but Mellanox declined to enter into talks.
Peter Feld, a principal of Starboard Value, is a director of Marvell, which said on Monday it was buying smaller rival Cavium for about $6 billion.
Mellanox's shares opened 14 percent higher and were still up 11 percent at $56.65 by 1552 GMT. They had risen 25 percent this year through Monday, underperforming Marvell's 56 percent rally and a 48 percent increase in the Philadelphia Semiconductor index.
According to a source close to the deal, Starboard has been involved in the semiconductor sector for a decade, investing in dozens of chip companies where it led improvements.
The source noted that Starboard - which believes Mellanox is spending too much on research and development and other corporate expenses to try to boost revenue, sacrificing margins compared with peers - must stop disappointing investors.
"They need to improve financial performance or sell the company. Either way it is to see the stock price go up significantly," the source said, noting there was a "long list of potential buyers" for Mellanox.
Mellanox, which was founded in 1999 and has a market value of nearly $3 billion, said in a statement on Tuesday that it "welcomes the input and investment" from all its shareholders.
"In line with our commitment to drive enhanced shareholder value, the Mellanox board of directors and management team continually review our operational and strategic priorities and are committed to acting in the best interests of our shareholders," it said.
The chipmaker beat third-quarter results expectations last month but disappointed analysts with its fourth-quarter revenue outlook.
Barclays analyst Joseph Wolf, who downgraded Mellanox to "underweight" after its earnings report, said that while there is room for Mellanox to cut expenses, its growth stems from accelerating revenue during product transitions.
"Influencing change in this company is possible but could take time," Wolf said.
(Editing by Susan Fenton)