In an effort to stay relevant, it seems Intel is looking to make its biggest acquisition ever. The Wall Street Journal reported last Friday that the giant chip-maker is in talks to buy Altera-(NASDAQ:ALTR), a maker of chips for networks and cars. The end valuation came out to be $13.4 billion, a huge price tag for Intel-(NASDAQ:INTC), who has historically stuck with smaller acquisitions.
The move would help Intel absorb a much smaller, but must faster growing business, something investors have worried over since reports last year that the PC market was dying and Intel missing the boat on mobile. Intel still derives about 60% of its revenues from the PC market, so while the rumors of the PC dying may be exaggerated, it’s still cause for concern. However, what Intel does have going for it is its Internet of Things business, which has been dubbed the next high growth market in technology, estimated to grow from $1.9 trillion in 2013 to $7.1 trillion by 2020. This acquisition will simply help Intel beef up its core business of chips.
As the Wall Street Journal report says, “The acquisition makes a lot of sense for Intel. Altera isn’t a big name, but it builds chips that represent the future of the massive data centers that power the internet.” That chip is called a field programmable gate array, or FPGAs. The chips perform very small tasks and don’t use as much power as the chips that have traditionally powered our internet services. Microsoft used these chips to help it power Bing, for example. At this point, Intel doesn’t manufacture FPGAs, and it based on its interest in Altera, it seems that acquiring the smaller company would put Intel in a better position than trying to compete with it.
No price too big?
So yes, the deal makes perfect sense for Intel. But what about that price tag? When the news of the possible deal hit, Altera’s market value went from $10.5 billion to $13.4 billion. Intel’s last reported cash balance was $14.1 billion. The company’s biggest acquisition to date was when it bought McAfee for $6.8 billion in cash, which was about 37% of its cash on hand. Not only does this suggest that Intel is pretty darn serious about remaining relevant in the chip industry, it also suggests that Intel would need to do quite a bit of stretching to make the deal happen, and it will likely include issuing stock or debt in order to offer a deal Altera shareholders can’t refuse.
Intel (blue line) V’s Altera Stock Price: When the news broke Altera market price surged
This is likely a deal that will be talked about long before anything actually happens. Based on Intel’s current cash situation, there is still a lot more work for it to do before it can present a compelling offer. But in general, investors should see this as a sign of good things to come for years. If Intel is willing to bet everything on one horse (and it’s a pretty fast one at that), it’s serious about being around for years to come.