Media reports circulating late Friday suggested that Intel is in talks on a potential acquisition of Altera. Investors drove Altera's shares 28% higher on this news. While no terms or time frame were released, and the potential remains that a deal won’t materialize, we believe an Intel-Altera combination would provide benefits mainly in Intel’s data center segment. The Natural Resources Defense Council estimated that, in 2013, nearly three percent of all power in the United States was consumed by data centers. As a result, we see Intel’s server customers looking to reduce the total cost of ownership by reducing power consumption. Programmable logic devices, such as those offered by Altera, can be integrated with server chips, not only to allow developers to reconfigure the chip's functionality, but also reduce power consumption by running applications more optimally. Due to the prior experience working together, we think there are synergies that can be unlocked with an acquisition. For now, we maintain our fair value estimates, economic moat, and moat trend ratings for both Intel and Altera.
As customers seek more customized solutions in server chips, working with a PLD designer is the next logical step. Intel has already begun the collaboration, but may find a complete acquisition as making more strategic sense, since it would be able to incorporate Altera’s research and development with its own efforts. Intel’s last major acquisition, McAfee in 2011, was an all-cash deal, and at the end of the fourth quarter, Intel reported $14.1 billion in cash, short-term investments, and trading assets. However, with only $2.3 billion cash and investments domiciled in the U.S, it is likely Intel would take on additional debt.
In 2010, Intel paired its Atom processor with an Altera PLD in a multichip set, code-named Stellarton. This provided the benefit of both application-specific integrated circuits (ASICs) and PLDs in one package, but featured a limited channel for the two die to communicate, preventing developers from taking full advantage. In early 2013, Intel announced Altera as a chip foundry client that it would make FPGAs for on its 14-nanometer process technology. Diane Bryant, Intel’s head of its data center group, also announced in June 2014 the integration of its Xeon processor with PLD in a single solution for clients seeking customized offerings. Also of note, as part of a 12-year agreement, Intel agreed that it would only build PLDs for Altera, forcing PLD competitor Xilinx to rely on Taiwan Semiconductor Manufacturing. Clearly the foundation for synergies has been built, but merging two entities is always a cumbersome process. At a market capitalization of $10.4 billion prior to the media report circulating, Altera would be Intel’s biggest acquisition to date.
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