recap
INTC has agreed to pay $3 billion to acquire a 15% ownership interest in ASML. In addition, it is pledging to make a $1 billion contribution to ASML’s R&D efforts to develop next-generation semiconductor lithography tools.
Yesterday, I wrote about the deal in general and about what ASML gets from it. Tomorrow, I’ll write about the specifics of the arrangement, as far as they’re known. Today’s topic is why INTC is interested.
a little history: evolutionary threats to INTC
A semiconductor factory costs, say, $3 billion to build and outfit. It will spew out maybe $8 billion worth of annual output.
Who has that kind of money to spend? …INTC and Samsung, and basically no one else.
More important, who has a high enough level of sales to use the plant effectively, once it’s up? …the same two, INTC and Samsung.
On the surface, this huge capital investment requirement represents a significant barrier to entry into the semiconductor-making business.
It did once. No longer, however.
The industry evolved.
Specifically:
–foundries like TSMC have started up. They own semiconductor plants but don’t manufacture products they design. They specialize in making chips under contract from third-parties. The fact the foundries aren’t direct competitors makes semiconductor design firms much more willing to trust their intellectual property to them.
–an intellectual property company, ARMH, began to develop and sell standardized chip designs to others, plus toolkits to customize them.
This laid the groundwork for lots of little semiconductor design firms to spring up, who create innovative enhancements to the basic ARMH design and have the chips made through foundries.
ARMH-based chips don’t have as much computing power as INTC offerings. But they’ve smaller and more flexible. They generate less heat and use less power. In other words, they’re perfect for use in the smartphone/tablet business they’ve enabled.
Over the years ARMH chips have also been gaining in computing power, to the point where they’re now beginning to be designed into PCs and low-end servers.
the INTC response
Just as ARMH chips have been adding computing power so they can enter traditional INTC markets, INTC has been working to make its chips smaller, cooler and less electric power-hungry. That way it plans to become a presence in the burgeoning mobile market now dominated by ARMH.
the Cloud is a plus
News on the mobile front isn’t all bad. The storage and computational limitations of mobile devices means they have to be backed up by very big and very agile servers in the “Cloud.” Virtually all Cloud servers run on INTC chips.
INTC thinks it has already pulled even with ARMH…
..in terms of small size, low heat and low electricity use for the chips it intends to be used in mobile devices. It’s done this both through chip design and by very aggressively adopting new semiconductor manufacturing technology. Most industry observers think INTC has at least a 1-2 year advantage in process techniques over foundries like TSMC. We’ll be seeing the first INTC-based smartphones and tablets late this year or early next.
where to from here?
This is where the ASML deal comes in.
Let’s assume that INTC presently has a two-year lead in process technology over other chip makers and that it anticipates needing next-generation manufacturing equipment four years from now. Will that equipment be available?
Maybe not.
If I were ASML and I thought I’d make some sales of next-generation equipment in 2017, but that no one else would be ready to buy until 2019-2020, I’d be in no rush to complete my research and development in the shortest possible time. I’d go to a lot of extra expense to do that, but I wouldn’t be able to really cash in until a couple of years later. And of course, I’d have the additional risk that rivals would reverse-engineer my machines and have better ones available when the the big market ultimately developed.
So I don’t think ASML has any natural incentive to speed up its R&D to suit INTC’s schedule. Therefore, without the ASML deal, INTC risks seeing its semiconductor manufacturing advantage frittered away as it is forced to wait for new machinery to be perfected. That’s why $4 billion may be a reasonable price for INTC to pay to eliminate this risk.
funding will come from offshore
INTC intends to use cash it has permanently invested outside the US to pay for the ASML deal. Were that money repatriated to the US, it would be subject to federal income tax of about $1.4 billion. So finding a potentially high-return use of the funds is in itself another plus.
That’s it for today. Tomorrow, the deal structure.