Tag Archives: finance

Intel (INTC) and Altera (ALTR): the numbers

April 2, 2015 By in mergers and acquisitions, semiconductor manufacturing, stock market, Technology Tags: , , , , , , , , 2 Comments

Let’s look at ALTR before word leaked to Wall Street that INTC was considering buying the firm.

the basics

ALTR was trading at about $35 a share, with earnings of, say, $1.75 a share in prospect for 2015   …in other words at about a 20x multiple.  The long-term growth rate of eps is probably in the low teens.   The market cap was $10.5 billion or so.

ALTR is one of two firms that together dominate the highly specialized market for programmable logic devices–a relatively stable, by technology standards at any rate, area.

20x for 10%-12% earnings growth doesn’t sent me running to the computer to place a buy order.

where the value is

small stuff

ALTR had $1.6 billion in net cash on the balance sheet at the end of 2014–that after spending $655 million buying back stock last year.

Yearly SG&A is running at about $300 million.  Let’s say INTC could eliminate half of this by substituting its own corporate infrastructure.  That would be enough to boost eps by 25%, so we’re looking at a 16 multiple on current earnings, which would be more reasonable.

the big attraction–intellectual property

The main source of value for INTC is the company’s accumulated knowledge, experience and computer code for creating and operating PLDs. How do we measure that?

The simplest, and only straightforward, thing to do is to add up R&D expenditures over, say, the past decade and see what that totals.  This will be an understatement, of the value of ALTR’s intellectual property because:

–there will always be some R&D related expenditure elsewhere on the income statement,

–duplicating the firm’s accumulated knowledge means spending in today’s and tomorrow’s dollars–not yesterday’s.  The former is always more expensive, and

–we won’t capture stock based compensation.

measuring

1. For ALTR, the 10-year total R&D  is $3 billion.  Arbitrarily add $500 million for stock based compensation.  Add in the net cash.  We get a total of $5 billion in “asset value.”  That doesn’t stack up well with ALTR’s pre-leak market cap.

2. Another approach.  Current R&D expenditure is running over $400 million a year.  Let’s say it would take ten years of spending at the current rate to duplicate ALTR’s intellectual property.  That gets us to $6 billion in “asset value.”

3. Let’s consider the future earnings stream (this is arguably just dart throwing).  Ignoring SG&A synergies, and with 300 million shares outstanding, $1.75 a share in eps translates into net income of $525 million.  Let’s say earnings in eight years are double that, or $1.05 billion.  If earnings progress in a linear fashion (another incredible simplification–but, hey, this is what securities analysts do), then the total earnings over the next eight years will be just over $6 billion.  (Why eight years?  My experience in analyzing corporate behavior in takeovers is that eight years is the outer limit of future earnings that companies are willing to pay for in an acquisition.)

 

Okay, we’ve got one figure, #1, that’s too low and another, #3, that’s too high- (and a giant leap of faith).  Let’s add them together!

They total $11 billion.

Ta da!

That gets us to around the market cap of ALTR before the leak.  To be clear, I’m not willing to defend to the death anything I’ve written so far.  But Wall Street had to be tacitly thinking something like this for the price of ALTR to be at $35.

the leak   …and a dilemma

Look back at #2 above.  For INTC, the alternative to acquiring ALTR is doing #2.  This would be expensive.  More important, it would be time-consuming–time that INTC probably doesn’t have.  And there’s the risk that its effort wouldn’t be successful.

Therefore, the value of ALTR is higher to INTC than to you or me.  INTC is probably also figuring that it can expand the ALTR business dramatically over the coming years by stuffing every one of its servers full of ALTR chips.  Therefore, $10 billion price leaves room for the acquisition to be accretive to earnings in a few years.  Also, SG&A synergies.

On the other hand, any of us with a loose $10+ billion will probably find a lot of things we’d rather do than plunk it all down to buy ALTR.  For us, $35 a share is a pretty rich price.

this brings us to the leak…

Both sides can make up numbers as well as I can.

Both know there are no other suitors.

Both know that INTC really wants ALTR.

Hence, the leak, which I would bet came from bankers representing ALTR.  The idea is–let the market bid up the price/decide what the price should be.

I’m not sure whether the leak makes the situation better or worse.  My guess is that a deal gets done somewhere between $35 and $40.

 

 

 

 

 

Intel (INTC0 and Altera (ALTR): implications

March 31, 2015 By in Industry Analysis, semiconductor manufacturing, Technology Tags: , , , , , , , , , Leave a comment

What can we conclude from INTC’s interest in acquiring ALTR?

–when I became interested in INTC as a stock a couple of years ago, it seemed to me that the firm could be viewed as having two businesses–a high-growth one selling servers and a low-growth, cash cow one selling chips for PCs.   At the time, I thought the server business alone more than justified the then stock price, and that the PC business was mainly important for its contribution to overhead and its free cash flow generation.  A desire to acquire ALTR seems to confirm that this is also INTC management’s view.

–good companies periodically reinvent themselves.  After a period of stagnation, this appears to be what INTC is doing

–the threat of low power servers run by ARM chips is serious

–my guess is that a bid will take the form of all or mostly INTC stock.  An all or largely cash offer would imply either that INTC thinks its shares are deeply undervalued, that debt financing is too ridiculously cheap to pass up, or that long-suffering ALTR shareholders want  to declare investment victory and move on.

–an INTC-ALTR merger spells trouble for Xilinx (XLNX), the main competitor to ALTR

–the main source of value in ALTR is its software.  Assessing that, thorough accumulated R&D spending, is the key.

Numbers tomorrow.

Grexit a 50/50 possibility…

March 24, 2015 By in economics, EU financial crisis, Greece Tags: , , , , , , , Leave a comment

…according to financier George Soros.

Personally, I have a hard time dealing with Mr. Soros’s Donald Trump-ish nature.  In his book The Alchemy of Finance, for example, he claims to have invented the thesis-anti-thesis-synthesis explanatory pattern that was introduced to European thought by Hegel in 1807 and developed by Marx later in that century.  Hard to believe Mr. Soros, who studied philosophy, is completely unaware of either of these seminal figures.  I’ve also thought that a significant amount of the success of his Quantum Fund was due to Soros’ less well-known partner, Jim Rogers.

If there’s one thing, George Soros knows about, however, it’s currencies and politics.  So his view that it’s a flip of a coin whether Greece stays in the EU or leaves, is well worth listening to.

The short story of Greece’s woes is that after joining the EU it racked up so much sovereign debt using the implicit repayment guarantee of being in the euro (kind of like having a credit card that can’t be maxed out) that it can’t possibly pay all of it back.  The gravity of the situation came to light several years ago when a newly installed (and now gone) government announced  the previous administration had been falsifying the country’s national economic accounts  for years.

Greece has since been negotiating for debt concessions in return for ending its spendthrift ways.  Its strategy so far has been to promise reform in return for debt relief   …but to do nothing.    This tactic seems to have recently passed its “sell by” date.  The EU and the IMF now appear to believe that the moral hazard risk of continue to accommodate Greece is worse than the potential damage to the Eurozone from expelling it.

As I see it, the ball is now clearly in Athens’ court.

For what it’s worth, I think Grexit would turn out to be a genuine tragedy for Greece, but far less damaging to the euro than is commonly believed.  Rather than giving encouragement to breakaway movements in the UK, Spain and elsewhere, I think Greece outside the EU–substantial currency depreciation, loss of access to external finance–would serve as a cautionary tale instead.    Think Argentina without the farm wealth.

My guess is that the euro would decline a bit on Grexit.  The banks might have a rocky time, too.  It’s very possible, though, that the markets would be happy just to have the situation resolved–and that any fallout would be small and short in duration.

 

 

yesterday’s Fed meeting announcement

March 19, 2015 By in bond market, currency markets, Federal Reserve, securities markets, stock market Tags: , , , , , , , , Leave a comment

My experience with Fed meetings is that the stock market usually heads off in the wrong direction on the release of the Fed statement and accompanying documents, but then quickly reverses course and moves in the way one might reasonably have predicted by actually reading the Fed materials.  This is not just computers trading.  The US market has operated this way for as long as I can remember.

Not this time, though.  Instead, the S&P made an immediate strong upward move   …and never looked back.

What’s different this time?

I think it’s the PDF where the Fed shows, among other things, where its voting members believe the Fed Funds rate will be at the end of this year, next year and in the longer term.

The previous release, in December 2014, showed the median estimate for 2015 at 1.0%.  For 2016, the figure was 2.5%.

Yesterday’s, in contrast, suggests the rate will be between 0.5% and 0.75% this December, and at 1.75% as we enter 2017.

That’s a big haircut for just three months.

The factors involved in the change are:

–the rise in the US$,

–moderation in domestic economic growth over the first quarter, and

–the lack of any sign of inflation.

Stocks and bonds spiked on the news.  The US$ came off its highs.

my take

Investors continue to be fixated on the numbers the Fed releases, and to be distrustful of any qualitative statement by the Fed saying it has taken the tragic 1990s example of Japan seriously and will err on the side of caution in raising rates.  Doesn’t make a whole lot of sense to me that the market doesn’t believe this, but it’s the way it is.

My stocks were having an unusually strong day yesterday before the Fed announcement.  They lost a bit of their relative strength afterward, though.  Arguably, this shows I was preparing for faster rate increases than the market now thinks will occur. I have no desire to become more aggressive, but I will be interested in how my stocks fare today.

I’ve been mulling over whether to try to play a potential rally in domestic-oriented EU stocks.  My experience is that this isn’t safe until the domestic currency in question has stopped falling.  I wonder if yesterday was a turning point?  Again, more data today.