Well, it’s happening. Intel (INTC), the world’s largest chipmaker, has agreed to buy rival semiconductor company Altera (ALTR) in a $16.7 billion all-cash deal that value ALTR stock at $54 per share.
Shareholders of both companies come out ahead on this one. What INTC shareholders get from Altera is not only a higher-margin business, but one that was gaining market share in server systems — an area responsible for 65% of Intel’s operating profit in the most recent quarter.
So while the deal is somewhat defensive for INTC, it should also start paying off quickly; Intel expects that the addition of Altera will increase the combined company’s earnings within a year of the deal’s close. (INTC expects the deal to close within the next six to nine months.)
As for owners of ALTR stock, what they get out of the deal is pretty clear: A boatload of cash. The $54/share deal represents a massive, 56% premium to Altera’s share price before news of negotiations broke in late March, according to the Wall Street Journal.
The Intel-Altera deal, while massive, isn’t even the biggest deal we’ve seen in the semiconductor space in the last week.
Consolidation is the Name of the Game
Last week, Avago (AVGO) agreed to buy Broadcom (BRCM) for a whopping $37 billion, making it the largest merger of chipmakers ever.
InvestorPlace Contributor Richard Saintvilus reported on the AVGO-BRCM merger, penning some particularly prescient words on forthcoming M&A activity in the industry (emphasis mine):
“So, when the Avago/Broadcom deal is signed, sealed and delivered, investors can expect a domino effect of more deals — whether of similar sizes or larger to unfold. Investors should pay particular attention to Intel, which desperately wants to make a splash with a strategic deal, especially given Broadcom’s advances in the Internet-of-Things.”
The semiconductor space isn’t the only area that’s got cash burning a hole in its pocket. In today’s days of easy money, corporate America has been feverishly buying back stock, issuing dividends, and snapping up rivals, looking for growth by any means possible.
The INTC-ALTR deal will be funded with a mixture of Intel’s cash on hand and debt. Intel nearly had enough cash and short-term investments (around $14 billion) on its balance sheets to entirely fund the deal without debt, but I wouldn’t be surprised to see Intel use a half-cash, half-debt structure to fund this deal.
The Altera deal further distances Intel from its worrisome exposure to the declining PC market, giving it a stronger hold on the far more promising business of server systems. Although Intel is down modestly today on the news, I’m still bullish on INTC stock, which trades at just 14 times earnings and boasts a 2.8% dividend.
As of this writing John Divine held no positions in any of the stocks mentioned. You can follow him on Twitter at @divinebizkid or email him at editor@investorplace.com.
