UPDATE 1-Mellanox shares jump 14 pct after Starboard stake purchase

* Starboard Value took a 10.7 percent stake in Mellanox

* It seeks to raise Mellanox's value and share price

* Mellanox's shares up 14 percent in Nasdaq trade (Adds details, Starboard/analyst comments, share reaction)

JERUSALEM, Nov 21 (Reuters) - Israeli chip maker Mellanox saw its shares surge at the open on Nasdaq on Tuesday after activist hedge fund Starboard Value LP bought a 10.7 percent stake to influence strategy.

Mellanox said it welcomed a dialog with its shareholders after Starboard disclosed its stake purchase and said there was a "growing disparity" between the chipmaker's margins, growth and stock price performance compared to its peer group.

"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.

In particular, Starboard is concerned that Mellanox rejected a potential merger with rival Marvell Technology. Starboard 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 at Marvell, which said on Monday it was buying smaller rival Cavium for about $6 billion.

Mellanox's shares were up 14 percent at $58.15 in early trading. They had risen 25 percent this year through Monday, compared with Marvell's 56 percent rally.

Mellanox, which has a market value of $2.6 billion, issued a statement on Tuesday saying 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.

According to the Wall Street Journal, Starboard believes Mellanox is spending too much on research and development and other corporate expenses to try to boost revenue, sacrificing margins compared with peers.

A month ago, Mellanox beat expectations in its third-quarter results but disappointed analysts with its fourth-quarter revenue outlook.

Barclays analyst Joseph Wolf, who downgraded Mellanox to "underweight" after its earnings report, said 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," said Wolf, adding that Mellanox's shares could move towards $55 if investors feel Starboard can be an effective agent of change. (Editing by Susan Fenton)

11/21/2017 9:39

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