Acquiring Altera Can Help Intel Retain Its Leadership In The High-Margin Data Center Business

2015 is turning out to be a landmark year for high profile consolidations in the semiconductor industry. Almost three months after NXP Semiconductors acquired Freescale Semiconductor and just a few days after Avago announced its acquisition of Broadcom (NASDAQ:BRCM), leading PC chipmaker Intel (NASDAQ:INTC) announced that it is acquiring Altera, a leading fabless vendor of Field Programmable Gate Arrays (FPGAs), for $16.7 billion. Intel has been in talks off an on to acquire Altera for the last few months, and the latter had rejected a previous bid by the former in April 2015. Intel has agreed to pay Altera $54 per share, a 10.5% premium to Altera’s Friday close and up  56% from March 26th, the day before the possibility of a transaction was first reported.

The persistent decline in PC shipments, its late entry in the mobile market, and increasing investment in building out its technology have all impacted Intel’s growth in the last few years, constraining revenue growth as well as its bottom line. By acquiring Altera, Intel hopes to further diversify its addressed markets, expand its line-up of higher-margin chips used in data centers, and reduce its dependence on the shrinking PC market. Like most other chipmakers, Intel aims to contend with growth and rising costs while trying to defend its position in its most profitable business (data centers).

Our current price estimate of $35 for Intel is just marginally above the current market price.

See our complete analysis for Intel

Altera’s Acquisition Can Help Intel Extend Its Lead In Data Centers & Expand Its Presence In Automotive, Industrial & Communication Applications

FPGA is a type of Programmable Logic Device (PLD) used in place of Application Specific Integrated Circuits (ASICs, a common type of custom device) for low volume applications, most commonly in communications equipment. Altera’s FPGAs are found in a wide range of products and applications that require complex custom logic (i.e., control) devices in unit volumes too low to justify the design of a custom ASIC.  Common applications include prototypes and high-end communications, networking, computing and industrial equipment. Interestingly, Intel, Altera and others have been advancing the use of FPGAs and Intel’s CPUs for advanced data center applications. Such devices would seem to have an obvious application in software defined networking equipment as well.

In the FPGA space, Altera is one of the two major competitors, and alongside rival Xilinx the two companies comprise the bulk of the market. Prior to this sale Altera already had a close relationship with Intel, with Altera using Intel’s 14nm process for their latest generation of Stratix FPGAs. Intel will benefit from handling the manufacturing of Altera’s FPGAs at 14 nm and (in all likelihood) below. Note, however, that for trailing nodes and existing FPGAs, Altera will most likely continue to use the services of its existing foundry, Taiwan Semiconductor Manufacturing (TSMC).

Intel is already talking about the possibilities they see for Altera’s FPGA technology in the Internet-of- Things (IoT) and datacenter markets, but also the company has confirmed that they will be integrating FPGA technology into some of their future Xeon products, to allow customers to essentially build-out semi-custom processors via the FPGA component. Intel already does on-package FPGAs for certain customers. ^[1]

The deal can give Intel the potential to create system-level solutions for servers, telecom infrastructure gear, and other products that combine processors, FPGAs, and other chips. Intel will also be able to better cater to the likes of Facebook and Google (and keep ARM rivals at bay) by giving these companies the ability to pull communication processing from expensive networking equipment into much lower-cost server blades. This  can help increase the companies share in the data center market.

By acquiring Altera, Intel will be able to bundle its processing chips with Altera’s programmable chips, which are used, among other things, to speed up web searches. The integration of Altera’s chips with Intel’s will create a new class of products giving customers a significant improvement in performance, lower costs and a lot more flexibility, according to Intel. Altera’s programmable chips will allow Intel to increase the computational capability of its Xeon server chips.

The Altera purchase will add to Intel’s non-GAAP earnings per share and free cash flow in the first year after it closes, which is expected within six to nine months. As a part of Intel, Altera will continue to support designs that couple its chips with others designed on ARM Holdings. Companies such as Qualcomm are leveraging ARM technology to try and break Intel’s dominance in data-center chips, where it accounts for more than 95% of the market.

View Interactive Institutional Research (Powered by Trefis):

Global Large Cap | U.S. Mid & Small Cap | European Large & Mid Cap More Trefis Research

1. Intel to Acquire FPGA-Specislist Altera for $16.7 Billion, Anand Tech, June 1, 2015 [↩]