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InfiniBand chips developer Mellanox Technologies (MLNX - Snapshot Report) recently announced that it has entered into a definitive agreement to acquire privately-held Kotura for approximately $82.0 million, subject to certain adjustments. The acquisition is expected to be completed in the second half of 2013.

Mellanox expects the acquisition to add at least a penny to a maximum of 3 cents to its fiscal year 2014 earnings per share. Apart from being accretive to the bottom line, the takeover of Kotura will enable Mellanox to open its first research & development (“R&D”) center in the United States.

Mellanox announced that it will continue to support Kotura’s existing customers and will also retain its product line. Kotura’s silicon-based photonics chip allows signals to pass between chips using photon (light) instead of electron. This makes data communication between chips much faster, an important criterion for the smooth running of modern scale-out data centers.

Currently, data centers are facing a huge challenge to improve communication speed between switches and routers in order to efficiently manage the ongoing data explosion. Data center administrators are finding it increasingly difficult to speed up interconnection between switches and routers from 10 gigabyte per second (“Gbps”) to 100 Gbps, primarily due to low deployment of 100 Gbps transceivers.

According to Kotura the bottlenecks behind the usage of 100 Gbps transceivers are the huge size of the first-generation C Form Factor Plugs (CFP – a standardized pluggable transceiver that supports 100Gbps Ethernet), higher consumption of power and higher costs.

This is where Kotura’s silicon photonics technology comes into play. Currently, Kotura offers a fiber-based transceiver that can deliver 100 Gbps inside the data center, which can eventually expand to 400 Gbps to 1.6 terabit per second (Tbps). Moreover, silicon photonics solutions consume low power compared to 100Gbps CFP transceivers.

Mellanox believes that the acquisition will boost its competitive position in the high-speed, scalable and efficient end-to-end interconnect solutions market for servers and storage systems. Mellanox will face significant competition from established players like Intel (INTC - Analyst Report), International Business Machines (IBM - Analyst Report) and Cisco (CSCO - Analyst Report).

Nevertheless, we believe that the addition of silicon photonics solutions to Mellanox’s product portfolio will boost its capability to offer faster and smaller interconnects to next generation data centers. This will boost customer base and top-line growth going forward.

Currently, Mellanox has a Zacks Rank #3 (Hold).

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