Paul Otellini leaving Intel (INTC)

Happy Thanksgiving  …a day late


Recently, Paul Otellini, CEO of INTC, informed that company’s board of directors that he intends to retire next May.  Stock market reaction has not been positive.  That’s understandable, since one of the key building blocks of the bullish case for INTC is the big change in corporate organization and direction Mr. Otellini created as chairman.  In many respects, his influence is similar to the positive effect Robert Iger has had on DIS.

It’s not 100% clear what’s going on, but there are several things we can conclude with a reasonable degree of certainty.  They are:

1.  This is Mr. Otellini’s decision, not the board’s.  Said another way, Mr. Otellini is not being forced out.  How do we know?  For one thing, Gordon Moore, a current board member and former INTC CEO, said the board tried unsuccessfully to convince Mr. Otellini to stay on for another year.  For another, if there were a problem, Mr. Otellini would never have been allowed to remain until next May.

The most likely reason for the resignation, in my view, is that either Mr. Otellini or a member of his family has developed a health or other personal problem that will require a lot of attention.  I don’t know that this is the case.  Thinking only as an investor in INTC, the exact reason is probably not important, however.

2.  There’s no heir apparent.  Were there a single clear successor to Mr. Otellini, his/her name would doubtless have been announced at the same time as the news of Mr. Otellini’s departure.   Either there’s no obvious internal candidate, or there are several roughly equal, highly qualified possibilities.  In the latter case, the board’s problem is how to promote one while not losing other stars who might leave to become the top person elsewhere.

3.  INTC may look to external candidates.   This may just be the board mouthing platitudes.  If not, it suggests there may be no satisfactory internal candidates.  Or the board may feel the company really needs a new infusion of out-of-the-box thinking.   Given the difficulties tech companies have often had under CEOs brought in from the outside (HPQ is the serial offender here), this is, to me, the most unsettling thing the board has said.

investment implications

For a holder of INTC like myself, the situation bears close watching.

The resignation comes as we’re waiting to see if Mr. Otellini has created enough innovation at INTC for the company to be able to provide a serious alternative to ARM-based chips for mobile devices.  If he has, then the identity of the next CEO is less crucial than if a more fundamental shakeup is still necessary.

The current stock price, which is around my cost, seems to me to be saying that ARMH will continue to run rings around INTC in the mobile arena.

According to Wall Street’s odd logic, either the consensus view is correct–in which case the stock will find it hard to move up, but will keep on paying a high dividend, or it’s not–in which case the stock will likely move up a lot.  As a stock, therefore, INTC would appear to have a load of upside potential and limited chance for loss.

That’s been my thinking all along.  On the other hand, I didn’t expect INTC shares would come anywhere close to revisiting $20, especially in a generally uptrending market.  But it has.

What’s changed in the situation is that with Mr. Otellini at the helm, INTC had a leader capable of making needed changes.  Now we can’t be sure.

For what it’s worth, I’m content to hold my shares awaiting further developments.  I’ve got enough stock that I have no inclination to add more.  If I owned none, would I buy INTC shares at today’s price?  Yes, but not as much as I would have this time a year ago.

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