Introduction

In the Q4 NVIDIA Earnings Conference Call held Thursday, February 16, 2006, NVIDIA CFO Marvin Burkett said:

“We will continue to make acquisitions. We will continue to acquire, hopefully for cash. We do still have a stock buyback in place, so we will continue to do that.”

This is an interesting comment to explore. Which companies would be ideal acquisition targets for NVIDIA? We can wait for analysts to speculate on the answer using publicly available information, but I think I’d make a good analyst as well. Figuring out which company is in NVIDIA’s sights isn’t too hard. We only need to make two assumptions. Any acquisition deal must:

1. Be beneficial to NVIDIA.
   
2. Be beneficial to the company being acquired.
   

With those two assumptions, all I really need to do is to pretend that I’m NVIDIA’s CEO, Jen-Hsun Huang. I just need to ask a simple question: What would Jen-Hsun do?

What are NVIDIA’s Weaknesses?

When you acquire a company, you’re hoping to gain products or services that you are currently unable to offer… and um… I guess you’d also like to purchase a company that will help increase profits. These seem like reasonable principles, right? Not quite. NVIDIA has no market share when it comes to voice-over-IP technology, but this doesn’t mean that NVIDIA is looking to acquire a VOIP company. NVIDIA has zero market share in the highly profitable oil industry, but that doesn’t mean that they’re going to try to enter that market.

The ideal company for NVIDIA to acquire isn’t a company that will add new products or services or “fill in the gaps” of the existing line-up. Instead, the ideal target for NVIDIA would be a company that augments something that NVIDIA is already actively involved with, but is an area of increasing growth requiring additional resources.

Core Competencies

So let’s look at NVIDIA’s core competencies. When it comes to desktop GPUs, NVIDIA has it set with the GeForce 6 and 7. While NVIDIA would probably jump at the opportunity to buy out ATI’s design team, there’s no reason for NVIDIA to buy out any of the “second-tier” 3D graphics chip manufacturers such as BitBoys or Imagination Technologies (PowerVR). They don’t need extra help. How about workstations? Quadro FX has set the standard for 3D workstation applications and Quadro NVS has gained substantial popularity in the financial world that those products are intended for. There’s no reason for NVIDIA to try to acquire a company like 3DLabs from Creative. NVIDIA already has sufficient talent and success in this area also.

What about motherboard core logic? NVIDIA does benefit from an acquisition here, but we already know the answer to this one: ULi. With ULi on-board, NVIDIA will have all the resources they need for continued growth of the nForce line. They already have the widest range of products for the AMD platform, and they’re already moving to Intel and the mobile markets. This leaves NVIDIA with just three markets that they are actively involved in but still have room for substantial growth.