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Chip maker Nvidia has agreed to buy Israeli firm Mellanox Technologies for $6.8 billion as part of a strategy to double down on AI and data centres.

Silicon Valley-based Nvidia made a name for itself in graphics processing units (GPUs) for gaming, but has expanded into other types of chips, such as accelerator chips which speed up computing processes for artificial intelligence. The acquisition of Mellanox is expected to give its data centre and artificial intelligence business a boost. Nvidia is especially interested in AI applications in data centres – which many consider the future of data centre management. Mellanox specialises in high-speed networking chips, used to connect servers to one another in data centres.

The Nvidia-Mellanox deal is the culmination of a highly competitive bidding process, from which Nvidia emerged victorious over its biggest rival, Intel, as well as Microsoft and Xilinx.

Nvidia Chief Executive Jensen Huang estimates that the market for Nvidia’s computing chips combined with those of Mellanox is worth about $60 billion. Currently about 25% of Nvidia’s revenue comes from data centres. This segment is growing 52% year on year, and in 2018 brought in $2.9 billion in sales. One of the reasons Nvidia wants to build on it is that the slowdown in China and waning interest in cryptocurrency have started to impact its overall sales.

Nvidia is also strategizing to better compete with Intel in the data centre business. Like Nvidia, Intel has branched out from its mainstay computing chips into areas such as memory and networking in order to gain a bigger share of customer spending. Nvidia needs to keep pace. “It’s hard to not think Nvidia is just buying some revenue to help its case” in the data centre space, said Jason Carolan, Chief Innovation Officer of Flexential, an Nvidia customer which operates enterprise data centres.

At the same time, Reuters reports, the Mellanox deal could help ease Nvidia out of the hypercompetitive business of selling chips and into the lucrative business of selling complete systems, said Bob Wheeler, an analyst at chip research firm The Linley Group. Nvidia’s DGX system is an artificial intelligence computer in a box, while Mellanox has a growing business selling complete switches, which could be combined with Nvidia’s boxes, Wheeler said.

The deal is expected to close by the end of 2019, though it could run into some regulatory tangles in China.

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