This story appeared firstTechnical Manualand is republished here with permission.
Intel shares jumped 3% on Friday as The Wall Street JournalLauren Thomas, Laura Cooper and Asa Fitch reported that Qualcomm has talked to Intel about acquiring it for about ninety billion dollars, citing multiple unnamed sources.
The “big deal,” as the authors put it, is financially tight, as Qualcomm has $13 billion in cash and equity on its balance sheet compared to $13 billion in long-term debt. Even a large stock exchange would require raising large amounts of debt. Intel, moreover, already has nineteen billion dollars of long-term debt.
The deal is much larger than Qualcomm’s attempt to acquire NXP Semiconductor in 2016 for $38 billion. That was started at a time when Qualcomm had a large amount of cash locked up overseas before the Tax Cuts and Jobs Act of 2017 allowed Qualcomm to bring it back to the US (Qualcomm ended up using twenty-two billion of the cash back in buybacks when the NXP deal was canceled .)
The profile of the combination, moreover, would not be financially attractive, since Intel has a net profit of 35% to Qualcomm’s 76%. And Qualcomm’s pre-tax operating margin is close to 30%, while Intel’s fluctuates, but is actually barely 15% when all costs are accounted for. Intel could quickly reduce Qualcomm’s profit profile.
If we think, however, Qualcomm can pull it off financially, what are the synergies, that is, what will be gained financially and strategically from this move?
What Qualcomm needs most is diversification, as investors are still looking at mobile chip makers. It still gets about 70% of its quarterly chip revenue from mobile phones, although Qualcomm has been selling chips in the “Internet of Things” market and the automotive market for several years.
Buying Intel would quickly make the company the top PC microprocessor and server processor vendor, which would certainly change the company’s profile.
Intel needs to regain its manufacturing power. Positive announcements from the company earlier this week included indications of the company being “aggressive” in getting its new chip technology, “18A,” out next year. It’s hard to know what that momentum really means, and whether it will return Intel to greatness. Understandably, Intel needs help.
Qualcomm, which has no factories of its own, offers, obviously, nothing to help Intel in that regard. While it’s possible that Qualcomm’s higher-end products could give Intel a much-needed lifeline that could boost that momentum, I’m not sure that throwing money at the problem is the solution. Most chefs in the kitchen will not plan the complex challenge of improving the performance of the Intel factory.
In addition, neither company has a solution to the problem of both, Nvidia, individually or jointly. While both Intel and Qualcomm have ample artificial intelligence resources, neither has been able to put a dent in Nvidia’s market dominance despite years of trying.
Qualcomm’s CEO, Cristiano Amon, may be seeing something deeper. Another possibility is that he sees a major alliance, of sorts, for Intel’s server chips and Qualcomm’s mobile chips that could somehow push Nvidia out of the AI market as AI moves to mobile phones.
This practice is referred to in the industry as “AI at the edge,” where the server and handset intelligently allocate work between them to perform optimal AI processing where it makes sense with available computing resources. One is doing private and low-level things on the handset, and heavy-duty AI types, in the cloud.
Nvidia doesn’t have a mobile chip offering, so that argument has some appeal. In addition, Intel’s major assets in so-called chip “packaging,” the ability to combine multiple chips into one large chip, could enable new types of mobile products beyond what Qualcomm is currently building with the help of Taiwan Semiconductor Manufacturing.
The main coalition to win Nvidia is still facing the problem that Intel’s “x86” chip design, which dominates PCs and servers, is nowhere in the handset business. It’s unclear whether the combined efforts of the two companies would make it worth it, with or without more AI capabilities.
You can think of many other, less obvious things. Intel will benefit from billions of dollars in “CHIPS Act” funding to build US factories, and perhaps Amon sees the possibility of raising Qualcomm’s profile by making it an American-made company.
It is also possible that Amon simply finds the stock trading too cheap. Intel shares are trading at double revenue and nineteen times next year’s expected earnings per share, among the lowest multiples in the industry.
For now, Qualcomm investors don’t see much to be happy about. Qualcomm stock fell 3% on the news. Qualcomm has trailed the Nasdaq Composite this year, rising 17% versus 20% for the Index.
This story appeared firstTechnical Manualand is republished here with permission.
Source link
