Intel to buy Altera in nearly $17B cash deal

Intel (INTC) said it will buy fellow chip maker Altera (ALTR) for $54 a share in an all-cash transaction valued at approximately $16.7 billion that will allow it to expand behind chips for personal computers into chips for smart cars and other newfangled technologies.

Altera makes programmable chips, or chips that can be configured by customers after they buy them. These programmable chips are increasingly being used in data centers for cloud computing — a business line that's been profitable for Intel as more people store data online.

Intel also expects the programable chips to be an area of growth in an emerging market known as Internet of Things, or IoT, which connects clothes, cars and other everyday items to the Internet.

"With this acquisition, we will harness the power of Moore's Law to make the next generation of solutions not just better, but able to do more," said Intel CEO Brian Krzanich. "Whether to enable new growth in the network, large cloud data centers or IoT segments, our customers expect better performance at lower costs."

Moore's Law is the prediction that the number of transistors that can fit on a silicon chip will double every two years as technology advances. The theory has been at the center of Intel's growth strategy.

The benefit to Altera's chips is that they can be designed much more quickly than Intel's processors, the vast majority of which are found in PCs and servers, says Richard Doherty, research director of The Envisioneering Group, a technology consulting and analysis firm based in Seaford, New York.

"Altera does custom logic chips, which you can do in days, weeks or months," he said. "When Intel does a new chip ... it really takes three years from tweaking the memory and the processor and the cache and things on it. It's pretty much three years from concept to delivery."

Indeed, Intel executives on Monday said they expect companies like car manufacturers to start relying more on programmable chips, known as FPGA, rather the current standards, known as ASIC. The benefit of the FPGA chips is that they are cheaper but still flexible because they can be programmed "as the car is shipping out the door," and updated in real time, an executive said.

In the same conference call, CEO Krzanich said he expects growth from new business to drive 60% of the value created from the acquisition. Cost savings will drive 40% of the deal's value, he said.

The transaction, which is expected to close in the next six to nine months, should be accretive to Intel's adjusted earnings and free cash flow in the first year after close, the company said.

Intel based the acquisition price on expectations for 7% annual compound growth from Altera, executives said in the conference call. Such growth will be found in cost savings and other synergies, such as Intel's architects teaming up with Altera's architects to improve their chip designs, Intel executives said.

Last year, Altera posted revenues of $1.9 billion, generating cash flows of $700 million.

The nearly $17 billion acquisition is just the latest in what has proven a tech acquisition boom. Last month, chipmaker Avago snapped up Broadcom for a hopping $37 billion, marking the largest semiconductor acquisition in history. And in April, Finish telecom-equipment maker Nokia acquired its French rival, Alcatel-Lucent, in an all-stock deal valued at $16.6 billion. Verizon also recently announced plans to buy media company AOL for $4.4 billion, while AT&T's merger with satellite TV provider DirecTV could be a done deal as soon as this month.

Intel has been looking for ways to diversify its business lines amid a decline in revenue from personal computers. Data centers used in cloud computing has proven a boon to the chip maker thus far, but Altera could help with that growth, experts said.

Altera, meanwhile, has been suffering from unexpected weakness that has hit companies supplying chips for the mobile infrastructure space, or cell towers.

Altera shares jumped 6% to $51.76 a share in afternoon trading, but it's trading below the acquisition price suggesting investors are worried the deal could hit roadblocks.

One reason for the discount may be that Altera was widely reported to have rejected Intel's offer to buy it for $54 a share in April. Monday's deal was unanimously approved by the boards of both companies, but it is still subject to certain regulatory approvals and approval of Altera's stockholders, which could open the door to shareholders demanding more money.

Angelo Zino, an analyst with S&P Capital IQ, doesn't think the deal will be contested, despite the stock trading below the $54 a share offering price. Regulators are unlikely to block it since Intel is seeking to expand into a new businesses with the acquisition, Zino said.

Altera shareholders, meanwhile, are getting a massive premium to the stock price, or 56% above where the stock was trading before reports of the talks first leaked in March. "From my perspective, I think this deal gets done," Zino said.

Some Wall Street analysts questioned whether Altera will truly be able to fix Intel's biggest problem, which is the softening PC business. But Doherty said Intel is buying more than new product lines. It's also investing in a new way of doing business.

"It's not a technology they are buying. It's a mindset," Doherty said. "They are buying a different approach to getting to market quickly and it's going to interesting to see if Intel tries to absorb them, like all their other acquisitions. Or whether this will be one where there will be a true business line and a true character and flavor to it."

Shares of Altera competitor, San Francisco-based Xilinx, were up 1.8% to $48.29 a share on it's competitor's fortunes. Intel's shares traded down 1.7% to $33.86 after rising initially on Monday.