Starboard Value Criticizes Mellanox for Stock Sales

Starboard Value, the activist hedge fund, is taking up a new line of attack as it pushes for change at Mellanox.

It is accusing the chipmaker’s top executives and board members of not having enough faith in their company.

Starboard Value sent a letter to Mellanox on Monday morning arguing that company insiders have consistently sold shares since its initial public offering in 2007 — while having bought stock on the open market only just once, and not since 2013.

It is an unusual line of attack as Starboard seeks to unseat Mellanox’s nine-member board. Last month, the hedge fund began its proxy fight after arguing that the company, which makes computer networking chips, has not done enough to improve its operations.

The hedge fund says the stock sales suggest that Mellanox’s top ranks are more concerned with cashing out their holdings than staying financially invested in their company over the long term.

“The purpose of stock grants to directors is to increase alignment with shareholders and ensure that directors have a personal financial interest in the company,” Peter Feld, a managing member of Starboard, wrote in the letter. “The actions of Mellanox’s non-executive directors suggest the opposite.”

Last fall, Starboard — one of the highest-profile activists around, having ousted the entire board of Olive Garden’s parent company — disclosed that it had taken a nearly 11 percent stake in Mellanox.

Behind the investment was a belief that the company, which is based in Sunnyvale, California, and Israel, needed to improve its operations, including by being more focused on its research costs, or consider selling itself. Starboard’s interest in Mellanox arose after another semiconductor manufacturer that the hedge fund was invested in, Marvell, had unsuccessfully sought to merge with the chip company.

In its letter, Starboard argued that Mellanox insiders sold their shares at an average price lower than the $63.65 where the company’s stock closed Friday. At the same time, the hedge fund argued, the chipmaker has doled out significant amounts of stock as compensation to its executives compared to its peers.

Starboard said that its analysis showed that Mellanox’s management and directors appear to have sold their shares soon after their equity grants have vested.

Mellanox did not immediately respond to a request for comment.