In­tel agrees to buy Al­tera

The tech gi­ant will pay $16.7 bil­lion in cash for the smaller chip maker.

Los Angeles Times - - BUSINESS - By James F. Peltz

In­tel Corp., the Santa Clara mi­cro­pro­ces­sor gi­ant and pil­lar of Sil­i­con Val­ley, joined the merger wave sweep­ing through the in­dus­try by agree­ing to pur­chase smaller chip maker Al­tera Corp. for $16.7 bil­lion in cash.

It’s the sec­ond big deal in a week in a chip in­dus­try that is con­sol­i­dat­ing to adapt to slow­ing growth. On Thurs­day, Avago Tech­nolo­gies Ltd. agreed to buy Broad­com Corp. in Irvine for $37 bil­lion in the largest merger on record in the tech in­dus­try.

The In­tel-Al­tera mar­riage an­nounced Mon­day has been ex­pected. There were re­ports this spring that In­tel was ne­go­ti­at­ing to ac­quire Al­tera as a way to di­ver­sify its prod­uct line and ex­pand sales.

In­tel agreed to pay $54 a share for the San Jose com­pany — the same price that Al­tera re­port­edly re­jected about a month ago. The deal is sub­ject to ap­proval by Al­tera’s stock­hold­ers.

With sales of nearly $56 bil­lion last year, In­tel is the

lead­ing pro­ducer of mi­cro­pro­ces­sors used in per­sonal com­put­ers and large-scale data-cen­ter com­puter servers, mak­ing its chips the back­bone of world­wide email and Web pages.

Al­tera spe­cial­izes in designing so-called pro­gram­mable semi­con­duc­tors that can be tai­lored for spe­cific uses by its cus­tomers, pri­mar­ily those in the telecom­mu­ni­ca­tions, wire­less, au­to­mo­tive and net­work­ing in­dus­tries.

Al­tera, with sales last year of $1.9 bil­lion, is among the chip de­sign­ers that rely on out­side man­u­fac­tur­ers to pro­duce most of its semi­con­duc­tors. Those man­u­fac­tur­ers in­clude In­tel un­der a part­ner­ship formed in 2013.

Hav­ing Al­tera in-house means “we can make the next gen­er­a­tion of semi­con­duc­tors not just bet­ter but truly able to do more,” In­tel Chief Ex­ec­u­tive Brian Krzanich told an­a­lysts on a con­fer­ence call Mon­day.

The pro­posed deal also should help In­tel tap into a grow­ing seg­ment of the data-cen­ter mar­ket, said Christo­pher Rol­land, an an­a­lyst with FBR Cap­i­tal Mar­kets & Co.

In that seg­ment, some large In­ter­net play­ers such as Google Inc. and Face­book Inc. are adding pro­gram­mable chips from the likes of Al­tera to the main cen­tral-pro­cess­ing chips made by In­tel to boost over­all per­for­mance, in ef­fect tur­bocharg­ing their servers, he said.

“Now In­tel will be able to give their cus­tomers a chip that will com­bine the [ba­sic] server chips and th­ese pro­gram­mable chips into a sin­gle prod­uct,” Rol­land said.

Krzanich told the an­a­lysts as much, say­ing “In­tel con­tin­ues to drive Moore’s Law,” which is named af­ter In­tel co-founder Gor­don Moore and holds that the power of the tiny, dense inte- grated cir­cuits dou­bles about ev­ery two years.

“This ac­qui­si­tion is a per­fect ex­ten­sion of this strat­egy,” Krzanich said.

Me­dia re­ports sur­faced two months ago that In­tel was ne­go­ti­at­ing with Al­tera, and a month ago, Al­tera re­port­edly balked at a $54-ashare buy­out of­fer. That was a 46% pre­mium from Al­tera’s stock price of about $37 at the start of the year.

Al­tera’s re­jec­tion an­gered some of its in­sti­tu­tional in­vestors, in­clud­ing Par­nas­sus In­vest­ments, a San Fran­cisco firm that owns 2.7 mil­lion Al­tera shares, less than 1%, as part of its $16-bil­lion port­fo­lio.

Now that Al­tera has ac­cepted In­tel’s bid, “I’m glad they changed their mind,” Par­nas­sus Pres­i­dent Jerome Dod­son said. “It’s a rea­son­able price. They’re get­ting full value for the com­pany.”

Al­tera’s stock jumped $2.83, or nearly 6%, to close at $51.68 a share Mon­day.

In­tel, a com­po­nent of the Dow Jones industrial av­er­age, fell 56 cents to $33.90 a share.

The Avago-Broad­com deal would cre­ate the third­largest U.S. chip maker be­hind In­tel and Qual­comm Inc.

Now the mar­ket is won­der­ing if San Diego-based Qual­comm, a lead­ing maker of chips for smartphones, might also be shop­ping.

“Un­doubt­edly, they are go­ing to be look­ing; you don’t want to be the last guy to make an ac­qui­si­tion,” said Cody Acree, man­ag­ing direc­tor at As­cen­di­ant Cap­i­tal Mar­kets in Irvine.

There was spec­u­la­tion that Qual­comm might con­sider a ri­val bid for Broad­com, though Qual­comm de­clined com­ment about that last week.

Qual­comm has “a big cash bal­ance and, from what we can tell, an ap­petite to do a deal,” said an­a­lyst Romit Shah of No­mura Se­cu­ri­ties.

“They can grow or­gan­i­cally, but it just doesn’t seem like there’s strong growth,” Shah said. “Share­hold­ers want to see im­me­di­ate value, which means mak­ing de­ci­sions that en­hance the value of stock soon.”

In­deed, ac­tivist hedge fund Jana Part­ners has pushed for Qual­comm to split its li­cens­ing and chip busi­nesses, among other pro­posed ac­tions, to boost in­vestor re­turns.

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