Intel (INTC) and Altera (ALTR)

Late last Friday afternoon a rumor reached Wall Street that INTC is in talks to acquire ALTR, causing a sharp rally in ALTR shares and a modest one in INTC’s.  In hindsight, INTC appears to have been headed down this path for a couple of years, as a prescient article in the Electronic Engineering Journal (titled “When Intel Buys Altera”) pointed out last June.

Why a deal is potentially crucial for INTC:

1.  what ALTR does:  The company is one of the two dominant makers of Field Programmable Gate Arrays (FPGAs)–the other is Xilinx.   FPGAs are logic devices.  What makes them unusual is that they contain software that can be updated, revised or reprogrammed after the servers or telecom equipment (the two big markets for FPGAs) they’re in have already been built and installed.  The traditional upside of FPGAs is that they allow customized equipment to be put into the field and fine-tuned quickly.  Their downside is they’re more expensive than the pure-hardware alternative, ASICs (application-specific integrated circuits).

2.  INTC and Moore’s Law:  A factory to make current-generation INTC chips costs about $3 billion – $4 billion.  A next-generation factory, using much different equipment, will cost maybe $14 billion.  Samsung has already said it will build one; INTC says it’s too risky to build one by itself.  How, then, does INTC retain its technology/speed advantage over rival chipmakers?

3.  an INTC chip + a FPGA:  as reported in the EE Journal, INTC says linking an INTC microprocessor with a FPGA in a server can boost performance by 10x.  Bind the interface between the two closely enough can double performance again.

In other words, INTC + ALTR = huge step forward in chip performance.

why a merger and not a joint venture?

To my mind, the risk to both parties is too high for a joint venture.  INTC would have its lucrative server business in jeopardy if it committed to the FPGA route and the parties ever parted.  ALTR would have to devote a lot of resources to making its programming tools easier to use, potentially diverting attention from its telecoms customers.

More tomorrow.

 

 

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