Intel Corporation (NASDAQ:INTC) sounds like it’s about to make its largest acquisition ever, and as much as it sounds like a win-win, it still leaves INTC in the cold when it comes to microprocessors for cellphones and other mobile devices.
That’s not to say Intel’s acquisition of Altera Corporation (NASDAQ:ALTR) isn’t a smart move, even with a reported price tag of more than $10 billion. ALTR makes reprogrammable chips that are popular in things like wireless networks, servers and cars.
The advantage of these chips — known as field-programmable gate arrays (FPGAs) — is that they can be customized for various operations after they’ve been manufactured.
Another attractive aspect of Altera is that it has a higher growth rate than INTC. FPGAs are increasingly in demand, and that has sales and earnings zipping along.
Analysts expect ALTR revenue to grow 7% next year, according to a survey by Thomson Reuters. Earnings per share are forecast to rise almost 18%. Farther out, ALTR has a projected long-term growth rate of nearly 11%.
INTC, by comparison, suffers from being a massive and mature business left out of one of the most important markets of the day. Sure, INTC dominates the PC market’s need for chips, but PCs aren’t exactly an area of growth. Mobile is the most important market now, a place where INTC doesn’t compete.
True, there are plenty of others problems weighing on the cyclical semiconductor industry, but INTC failure to do meaningful business in mobile weighs on growth, too. Intel’s revenue is expected to decline this year. EPS are projected to fall to $2.14 from $2.31 a year ago.
However, next fiscal year looks better, with revenue growth of 4.6% and a 12% increase in EPS, but it’s clear ALTR could help drive those numbers up. (INTC has a long-term growth rate of 9%.)
Market Applauds INTC
Certainly the market thinks this deal would be a win-win. ALTR and INTC stock cooled off substantially Monday, but at the end of last week, when reports of the potential deal first broke, share in both companies took off. That’s an especially good sign for Intel stock, because ordinarily, shares in the company doing the acquiring fall on mergers and acquisitions news.
As for ALTR, as bright as business and its broader market may be, share performance has been disappointing recently even by the less-than-inspiring action in the chip industry. Altera was off about 6% for the year-to-date before the deal rumor, versus a 1% gain for the Philadelphia Semiconductor Index. (INTC is still in a hole year-to-date, down more than 13%.)
A fat premium for a lagging stock is just what ALTR shareholders needed. Even after Monday’s selloff, ALTR is is holding on to a gain of 13% for the year-to-date. (Altera stock rose 30% at the end of last week.)
So, ALTR shareholders would get a nice payday, and INTC would get a business with better growth prospects. The acquisition would also keep Intel’s production line busy, which is always good for margins.
Most importantly for INTC, without a presence in mobile, it’s going to need to buy growth. There’s no shame in that; it happens to plenty of mature companies. What Intel stock really needs, however, is for the company to become a player in wireless devices, and ALTR doesn’t do anything for that problem.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.