Intel Inside to to takeover target
The decline of Intel from its position as a global leader in the semiconductor industry to a potential acquisition candidate illustrates the shifting dynamics of the tech landscape. Three years prior, Intel commanded a market valuation exceeding twice its present worth, while Chief Executive Pat Gelsinger actively sought acquisition opportunities. Intel has now become a target for acquisition, reflecting the impact of strategic miscalculations alongside the surge in artificial intelligence, which have collectively altered the trajectory of one of America’s most renowned semiconductor firms.
The recent acquisition strategy employed by Qualcomm, as detailed by The Wall Street Journal on Friday, underscores a rare vulnerability in Intel’s 56-year legacy. Manufacturing setbacks marked the onset of challenges prior to Gelsinger’s leadership. The situation has deteriorated as the CEO implemented an expensive turnaround strategy that did not anticipate the surge in interest in AI, which has significantly shifted demand towards chips produced by competitor Nvidia.
“In the last two to three years, the transition to AI has undoubtedly been the decisive factor in their decline,” remarked Angelo Zino, a seasoned industry analyst at CFRA Research. “They simply lacked the appropriate capabilities.”
While Intel may exhibit a willingness to engage, the prospect of a deal with Qualcomm remains uncertain due to regulatory hurdles and various other factors. However, the prospect of the smartphone-chip behemoth taking over Intel would have seemed nearly inconceivable until recently. For decades, Intel held the position of the world’s most valuable semiconductor company, with its chips being nearly omnipresent in personal computers and servers. In an era marked by growing specialization, it was uncommon for a company to both design and manufacture its own chips—yet this firm excelled as the global leader in both domains.
When Gelsinger assumed the role of CEO in early 2021, Intel had diminished in stature, trailing its Asian competitors in the pursuit of producing the fastest chips with the most compact transistors. Gelsinger, a veteran of Intel with decades of experience and the company’s inaugural chief technology officer, devised a strategy to restore the confidence and assertiveness that characterized Intel’s leadership under figures like Andy Grove and Paul Otellini.
Accomplishing this would require closing the gap with Asian competitors, notably Taiwan Semiconductor Manufacturing Co. and Samsung Electronics. He also intended to invest significantly in expanding Intel’s manufacturing capabilities, aiming to offer production capacity to design-centric chip firms like Qualcomm—entering the foundry sector that is currently led by TSMC and Samsung. The undertaking was both expensive and audacious, yet the components appeared conducive to success: a robust primary operation focused on manufacturing chips for personal computers and servers, complemented by a range of ancillary ventures that could finance Intel’s forthcoming phase of expansion.
Gelsinger promptly aimed to leverage Intel’s financial assets to enhance the contract chip-making sector, initiating discussions to acquire GlobalFoundries for approximately $30 billion in the summer following his appointment. The agreement ultimately fell through; however, in an interview conducted in August 2021, the CEO indicated that Intel continued to pursue acquisition opportunities. “Consolidation within the industry is anticipated,” he remarked to the Journal. “This trend is likely to persist, and I anticipate that we will position ourselves as a consolidator.” Ultimately, he opted for the acquisition of Tower Semiconductor, a fellow contract chip manufacturer, for over $5 billion; however, that transaction was terminated last year due to the lack of approval from Chinese regulators.
Intel’s contract-manufacturing division has experienced a sluggish beginning in its pursuit of Gelsinger’s ambition to establish the company as the world’s second-largest in this sector by 2030. The organization experienced a succession of leaders and a variety of prospective clients who curtailed or withdrew their business following a series of technical errors.
As expenses escalated at Intel, generative AI began to gain traction. The surge in demand has redirected attention from Intel’s central processors to Nvidia’s graphics processing units, which, due to their distinct architecture, are more adept at facilitating the development and implementation of advanced AI systems. While tech companies clamored for Nvidia’s limited supply of AI chips, a significant number of Intel’s processors remained unsold on the shelves.
Gelsinger was necessitated to implement cost reductions to safeguard his turnaround initiative. Intel commenced a series of layoffs affecting thousands of employees in 2022 and subsequently reduced its dividend in the previous year. It proved insufficient. In the previous month, Gelsinger announced plans to reduce its workforce by 15,000 employees, implement cost savings of $10 billion in the coming year, and eliminate the dividend. “The AI surge was significantly more pronounced than I anticipated,” Gelsinger remarked at the time, describing the cuts as “the most challenging decision I’ve faced in my career.”
Last week, Intel unveiled a series of strategic initiatives, which encompass enhanced spending controls and a deeper delineation between its design and manufacturing functions. However, Gelsinger refrained from divesting or spinning off the manufacturing segment, despite calls from certain investors for such actions. “We must strive for every advantage and enhance our execution to unprecedented levels,” Gelsinger conveyed to the workforce. “This is the sole approach to appease our detractors and produce the outcomes we are confident we can attain.”
Analysts suggest that while the prospects for a positive turnaround in Intel’s fortunes are diminishing, they remain within the realm of possibility. Reducing expenses may enable the company to navigate its challenges, yet the downward trajectory of its stock price has rendered it increasingly susceptible to acquisition attempts and shareholder agitation.
As of Thursday’s close, Intel’s stock had declined by nearly 70% from its peak in early 2020, a period that marked its highest valuation since the dot-com era. Nvidia’s stock has surged over 18 times during that timeframe. Intel’s shares rose by 3.3% during Friday’s trading session following the Journal’s report regarding Qualcomm’s interest.
Stacy Rasgon, an analyst at Bernstein Research, indicated that Intel’s prospects hinge on the outcome of a forthcoming chip-making technology set to enter production next year, which the company anticipates will propel it ahead of its competitors, at least in terms of technological advancement. Reestablishing technological leadership may enhance profit margins and foster confidence among consumers.
Intel faces a persistent challenge: its primary chip segment is unlikely to rebound swiftly, particularly in the context of sustained robust investment in AI chips. “One can debate the merits of the strategy, yet the fundamental issue lies in the fact that the core business fails to underpin the chosen direction,” Rasgon stated. At this juncture, however, it appears that the opportunity for them to intervene may have passed.
Acquiring Intel could enable Qualcomm to penetrate new sectors within the semiconductor industry. Qualcomm focuses on mobile-phone chips, serving as a supplier for Apple’s iPhones and various other devices. In recent years, it has been expanding its portfolio to include automotive and internet-of-things chips. Intel is poised to expand its portfolio with a significant range of chips tailored for personal computers and servers.
It remains uncertain whether Qualcomm would retain Intel’s manufacturing operations in any potential agreement. These operations distinguish Intel’s business model significantly from that of Qualcomm, which relies on outsourced production. The intricacies and costs associated with manufacturing are substantial. Intel allocated $25.8 billion towards capital expenditures last year, representing approximately 48% of its revenue. In its most recent fiscal year, Qualcomm allocated $1.5 billion towards capital expenditures, representing slightly more than 4% of its revenue.
