This article was originally published in The Technology Letter and is republished here with permission.
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The Wall Street Journal’s Lauren Thomas, Laura Cooper, and Asa Fitch report, citing anonymous sources, that Qualcomm has approached Intel about a possible acquisition for up to $90 billion. As a result, Intel’s stock price rose 3% on Friday.
As the authors say, this “massive” deal is financially difficult. That’s because Qualcomm’s balance sheet has only $13 billion in cash and equivalents compared to $13 billion in long-term debt. Even if it were mostly an equity exchange, some large amount of borrowing would be required. Additionally, Intel already has $19 billion in long-term net debt.
The deal is much larger than Qualcomm’s attempt to acquire NXP Semiconductor for $38 billion in 2016. The plan began at a time when Qualcomm was stagnating large amounts of cash overseas ahead of the 2017 Tax Cuts and Jobs Act, which Qualcomm was able to bring back to the United States (the NXP deal When it was canceled, Qualcomm ended up spending $22 billion in repatriation money on stock buybacks.) )
Additionally, the profile of this combination is financially unattractive, as Intel’s gross margin is 35% compared to Qualcomm’s 76%. Also, Qualcomm’s pre-tax operating margin is close to 30%, while Intel’s is breakeven on an adjusted basis, but is actually down 15% when all costs are taken into account. Intel would immediately dilute Qualcomm’s profit profile.
But assuming Qualcomm can pull it off financially, what synergies would it get from such a move? In other words, what would it get financially and strategically from such a move? Will I get it?
What Qualcomm needs most is diversification, and investors still think of Qualcomm as a mobile phone chip maker. Even though Qualcomm has been selling chips to the Internet of Things (IoT) and automotive markets for several years, the company still derives about 70% of its quarterly chip revenue from mobile.
Acquiring Intel would instantly make the company a top vendor of PC microprocessors and server processors, and would certainly change the company’s profile.
Intel needs to regain manufacturing capacity. The company’s positive announcement earlier this week included mention of the company having “momentum” to launch its latest chip technology, 18A, next year. It’s hard to know what this momentum actually means and whether it will bring Inter back to greatness. It’s possible that Intel needs help.
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Qualcomm, which doesn’t have its own factories, ostensibly offers nothing to help Intel in this regard. Qualcomm’s high-margin products could provide Intel with a much-needed financial lifeline and further its momentum, but whether throwing money at the problem is the solution? I don’t know. Adding more cooks to the kitchen won’t streamline the complex task of ramping up Intel’s factory operations.
Additionally, neither company, individually or jointly, has solutions to Nvidia’s mutual problems. Intel and Qualcomm both have deep artificial intelligence resources, but despite years of efforts, neither has been able to stem Nvidia’s market dominance.
Qualcomm CEO Cristiano Amon may have something deeper in mind. One possibility is that as AI moves to mobile phones, Intel’s server chips and Qualcomm’s mobile chips could somehow form a large-scale partnership that could somehow squeeze Nvidia out of the AI market. That means he is watching.
This phenomenon is referred to in the industry as “AI at the edge,” where servers and handsets intelligently distribute work between them to deliver the most efficient AI processing given the available computing resources. . Private, low-resource processing runs on the handset, and the most heavy-duty types of AI run in the cloud.
This argument has a certain appeal because Nvidia doesn’t offer mobile chips. Furthermore, Intel’s considerable assets in so-called chip “packaging”, the ability to combine multiple chips into one giant chip, exceed what Qualcomm currently manufactures with the help of Taiwan Semiconductor Manufacturing. New types of mobile products may become possible.
A major alliance to take down Nvidia still faces the problem that Intel’s x86 chip architecture, which dominates PCs and servers, has no place in the handset business. It is not clear whether the combined efforts of both companies, with or without many AI capabilities, will be relevant in this regard.
You can imagine many other, less attractive possibilities. Intel plans to spend billions in CHIPS Act money building factories in the U.S., and perhaps Amon sees the potential to raise Qualcomm’s profile by making it an American-made company.
It’s also possible that Mr. Amon simply thinks the stock price is too low. Intel stock trades at two times sales and 19 times next year’s earnings per share, the lowest multiple in the industry.
For now, Qualcomm investors don’t think there’s much to celebrate. Qualcomm stock fell 3% on the news. Qualcomm has lagged the Nasdaq Composite Index this year, which is up 17% versus 20%.
This article was originally published in The Technology Letter and is republished here with permission.
This post originally appeared on fastcompany.com.
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