The chip giant, Intel Corp (INTC, Financial) is in talks to acquire one of the leading manufacturers of field-programmable gate arrays (FPGAs), Altera Corporation (ALTR, Financial), according to a recent Bloomberg report. In fact, this acquisition could be the largest acquisition ever completed by Intel. The shares of Altera Corp. have soared about 25% after the rumored news of the merger began to gather storm, while Intel’s stock price is up by about 3%. Let’s dig a bit deeper to find out how Intel will benefit from this deal in the long run.
The terms of the deal
Media sources state that people familiar with the matter know that the chip giant is in advanced conversation with Altera to buy it out and to take advantage of its leading stand in manufacturing low-power field-programmable gate arrays. In fact, this move has been appreciated by Wall Street analysts who were speculating on such a possibility since 2013, when Intel signed an agreement with Altera for being its foundry of choice for advanced chips.
And now the partnership seems to have become so important for Intel that the company is ready to invest over $10 billion for the buy-out of Altera. Since February 2013, Altera chips are being manufactured in Intel’s cutting-edge plants.
Benefitting Intel in the long run
Altera designs FPGAs that are used in telecom and computer networks, cars and other products where they are reconfigured to take off the workload pressure from the main compute system, thus aiding in making the latter perform better with enhanced speed.
Intel’s management have already expressed their interest to shift their focus from the moribund PC market as there is a rapid slowdown being witnessed in its PC business sales. Due to several prevailing headwinds in the PC market, Intel was forced to cut its first quarter sales forecast by $1 billion early last month. Also, as per research firm IDC, PC shipments are predicted to decline 4.9% this year, which does not spell good news for the chipmaker.
However, the data center group of Intel is a bright spot at the present juncture, and profits from this business segment soared to $7.28 billion on sales of $14.4 billion in 2014. And now the company urges to grow its data-center group and as per several analysts, this acquisition would help Intel to make inroads into corporate data centers and will reduce its dependence on the PC business which is feeling the heat by the rise in mobile computing.
Analysts worldwide are of the opinion that Intel could make use of Altera’s technology to create new processor designs that would be placed in its traditional products with the low-power communication chips of Altera. Jefferies Group LLC have shared their optimism on the move and have quoted that this progressive move could let the company “offer cloud-service providers like Google, Amazon and Facebook the ability to pull communication processing from expensive networking equipment into much lower-cost server blades, effectively enabling Intel to take share in the data-center networking-equipment market.” In other words, the financial stability of the Data-center group would be somewhat guaranteed after this transaction enters completion phase in the near future, thus adding to Intel’s top and bottom line in the long term.
In the technology sector, semiconductor makers are turning to the door for acquisitions as they are looking for growth avenues in the coming years. To date, Intel’s biggest acquisition has been the purchase of security software maker McAfee Inc. in 2010 for $6.59 billion. So, if this deal actually goes through in the upcoming days, it could possibly change Intel’s data-center group’s fortunes for better, if not the best.
Betsy Van Hees, an analyst at Webush Securities, commented on the currently rumoured acquisition news – “This would be a significant move for Intel, it would be a significant change in strategy… They need diversification beyond the PC market. Data center has been a tremendous source of strength. Mobile has been a tremendous financial drain.”
It has been projected that buying Altera would drive Intel’s sales growth to 8.5% in 2016, far above the current expectations that are set at 4.7%. Also, as Altera competes with the market giant in Internet-server chips, such a buyout would help Intel to capture a sizable market share in the global server chip market.
Final word
It’s true that this deal would make a lot of sense in terms of financial gain for Intel Corp. But as time is the best judge, we have to wait and watch until the companies provide any further comments on this piece of rumored news. Intel investors are interested to know whether such a deal has actually kicked off from its end, and only time will give the correct answer to such queries.
