After a lot of speculation on the deal between the two well-known semi-conductor companies in the U.S., news sources have confirmed that Intel (INTC, Financial) has agreed to acquire Altera (ALTR, Financial) marking the high level of consolidation happening in the semiconductor industry. In fact, this deal comes just after the mega-deal which happened last week when Avago (AVGO, Financial) decided to buy Broadcom (BRCM, Financial) for worth $37 billion. After being rebuffed by Altera previously when trying to bid for the company, this time the largest semiconductor company in the world, Intel, has been able to place its cards well and has gained a positive signal form Altera’s shareholders with respect to this agreement between the two companies. Let’s quickly take a sneak peek into what are the details on the deal that have been shared from the management’s end of either set of companies.
The latest acquisition bid in the active semiconductor sector
Intel has finally agreed to buy Altera in a cash-cum-debt deal for about $16.7 billion marking the biggest deal ever struck by the former since its origination. As per the terms of the deal announced this Monday, the shareholders of Altera would receive $54 a share, similar to the price quoted during the initiation of merger talks last time when the deal had got rejected in April. This price is a premium of 56% over Altera’s stock price during last trading before the reports on possible talks between the two companies was reported in Wall Street Journal on March 27.
Intel, as of March 28, held about $14 billion in cash and short-term investments and possessed about $8.2 billion in long term investments. On Monday, Intel confirmed that though it held enough cash in hand it would fund the acquisition with a combination of cash and debt. This acquisition would aid Intel to gain new heights in the semiconductor space where it’s facing intense competition from peers. It is interesting to note that even prior to this breaking acquisition news, Intel and Altera were partners in the true sense. Till date, Intel makes the high-end semiconductors for Altera which designs the chips but uses other companies to churn them out.
The basic synergies
Intel is expected to use the programmable chips of Altera to grow its revenue amid slowdown in PC demand which has taken a toll on its overall sales. Intel is well-known for its general purpose microprocessor chips, but as on recent times there is a rising demand for field-programmable gate arrays (FPGAs) that are configured by customers to handle certain types of jobs after the chips move out from the production stream. This programmable chip technology of Altera could aid Intel in improving its position in selling chips for servers, as analysts have opined that to make chips that help to speed up the servers, Intel would need to have an internal source of the technology and buying Altera serves this purpose well.
Since Altera chips are used in several markets that range from communications to consumer electronics, Intel could be aiming to grow its overall sales through such programmable chip sales. It seems that Intel intends to look beyond the struggling PC market in which sales has been on a constant decline since the peak in 2011.
 “The acquisition will couple Intel’s leading-edge products and manufacturing process with Altera’s leading field-programmable gate array (FPGA) technology… The combination is expected to enable new classes of products that meet customer needs in the data center and Internet of Things market segments…” Intel said in a statement.
In the first quarter of the fiscal year 2015, the data-center division of Intel saw sales growth of almost 19% as internet companies such as Google (GOOG, Financial) and Facebook (FB, Financial) built out their server operations. By acquiring Altera Intel would possibly be able to defend its most profitable business – providing server chips used in data centers and that has already been indicated in the statement given by the company during the announcement this Monday. As consumers are moving to tablets and smartphones and the age of PCs is slowing losing its lustre, the data centers are required to churn out information for the mobile devices and hence they need high-end Intel processors which could be easy to provide by the semiconductor giant after acquiring the FPGA technology of Altera.
Last word
While the acquisition of Altera is expected to be completed in the coming six to nine months by Intel, analysts have indicated that the former company’s addition would help in shoring up profitability of the latter. Altera’s purchase would add to Intel’s non-GAAP earnings per share as well as improve the free cash flow in the first year after the deal closes, as per the company statement. Hence, let’s stay tuned and keep an eye on how this acquisition takes its final shape in the pursuant months of the fiscal year.
