The secret behind the “largest tech acquisition in history”
The two companies have a combined market value of nearly $300 billion.
Over the weekend, my screen was dominated by a piece of breaking tech news: Qualcomm has approached Intel to discuss a full acquisition.
To be honest, after being bombarded with various industry information for a week, it would be hard to find any news that can be called breaking news. However, this news has attracted the attention of industry insiders and onlookers, and the reactions are mixed: the former said "no surprise", and a hard technology investor even said in the circle of friends that "Intel 'died' 20 years ago" and it was not unfair to be sold; while more people's reactions were surprise and astonishment.
Although Qualcomm and Intel declined to comment on the report, upon closer inspection, this possible deal is indeed interesting.
First, both are chip companies, mainly engaged in 2B business, but their brand awareness is indeed not low, especially Intel; second, the transaction was described in a detailed manner. First, the "Wall Street Journal" reported that although the transaction was far from being completed, the two companies had negotiated on the acquisition, and then CNBC confirmed and said that the contact was "in the next few days";
Third, the potential size of the transaction is large. Intel's current market value is about US$93 billion (about RMB 655 billion). Once the deal is completed, it will be the largest technology merger and acquisition in history, much larger than Microsoft's purchase of Activision Blizzard, Dell's acquisition of EMC, and Broadcom's acquisition of VMware, which totaled more than US$60 billion.
Fourth, both companies are listed companies. Qualcomm's market value is currently about twice that of Intel, exceeding $180 billion. The two companies have a combined market value of nearly $300 billion. They also have many common shareholders, such as Vanguard, BlackRock, State Street, Fidelity and other internationally renowned wealth management institutions, which are among the top ten shareholders of both companies.
Finally, Intel has gone from being the absolute "big brother" in the chip industry to being rumored to be acquired by its former younger brother. It is impossible to say that there is no drama. But in fact, whether it is Intel or Qualcomm, or even AMD, which is just watching from the sidelines, they are now being squeezed by Nvidia and are not feeling well.
Judging from the stock price reaction, Intel's investors are obviously more optimistic than Qualcomm's, but that's all. There is no such thing as a "strong alliance". The problems Intel faces cannot be solved by a transaction. If it is really acquired, Intel may only be destined to be split up. And with Intel's current stock price falling back to that of ten years ago, it is difficult for shareholders and management to accept this.
Qualcomm is unlikely to benefit from this merger. Intel's strategy in recent years shows that the company has increasingly deviated from the technological innovation on which it relies for survival, and has placed its hopes on the shift of supply chains caused by geopolitical tensions, and even on earning subsidies. In March this year, the US Department of Commerce announced that it would provide Intel with $8.5 billion in subsidies and $11 billion in loans through the Chips and Science Act.
What does it mean when a company that thrives on market economics and technological innovation begins to actively betray what it is proud of?
Intel was founded in 1968 and is the first generation of Silicon Valley startups, and venture capital was born. Founders Gordon Moore and Robert Noyce not only changed their own destiny, but also profoundly influenced the development direction of Silicon Valley and even the global technology industry. Qualcomm was founded in 1985 and focused on the wireless communications industry from the beginning. It launched the 3G industry standard CDMA technology, but because of market capacity, it can be said that Qualcomm has always been a younger brother of Intel and AMD.
The turning point came in 2007. With the gradual expansion of the mobile communications market and the rise of mobile Internet, Qualcomm became the world's largest wireless semiconductor supplier in the first quarter of 2007 and has maintained this position ever since. Intel, on the other hand, followed the common script of all established companies - weak response, slow transformation, and always sticking to the IDM model from design, manufacturing to packaging. Compared with Qualcomm, which only does chip design, this is obviously too "heavy".
As the mobile Internet became more and more popular, the PC became weaker. As a result, Qualcomm's market value reached $105.7 billion in November 2012, surpassing Intel for the first time. To make matters worse, Intel has not been doing well since then. For example, in 2020, Apple also abandoned the X86 architecture and adopted the ARM architecture, and Intel lost Apple as a major customer.
In this process, you can't say that Intel didn't work hard. It explored new businesses, made investments and mergers, divested businesses, laid off employees, etc. In short, it did everything it should and shouldn't have done, but it still failed to reverse the decline. In 2021, Intel's new CEO Pat Gelsinger took office and launched a series of strategic plans, but the results are hard to describe.
At the beginning of his tenure, Pat Gelsinger proposed the strategic blueprint for IDM 2.0, including key themes such as Intel's optimization of its internal factory network, expansion of third-party foundry capacity, and construction of Intel Foundry Services (IFS). In layman's terms, in addition to making the old IDM model a little better, Intel will also try to grab the business of chip foundries such as TSMC. In order to compete with TSMC, Intel also attempted to acquire Tower Semiconductor for US$5.4 billion in 2023, but ultimately failed to obtain regulatory approval.
In short, it is not easy to be a high-end second-party. According to Wall Street Journal, IFS's business lost $17.5 billion in three years, which not only dragged down the already precarious main business, but also proved that it is difficult to grab the business of TSMC and Samsung.
At a recent Deutsche Bank conference, Gelsinger said, "The foundry business is more challenging than expected... Other chip companies seem willing to continue to work with Asian manufacturers rather than send their products to our factories in the United States. I would say this is surprising and disappointing."
Kissinger once said that IFS would not be profitable until 2030, which may not be confirmed now. But from an emotional point of view, Kissinger's surprise and disappointment are unfounded. After all, you betray the market yourself and expect others to cater to you. This is probably a manifestation of political immaturity.
From an investment perspective, an analyst at Seeking Alpha believes that although Intel is very cheap after a long period of decline and the downside risk is limited, because there is no catalyst, "it is difficult to see the possibility of strong upside."
Perhaps because Intel does not want to be trapped by the increasingly pessimistic market expectations, it has been quite active recently.
Earlier this week, Kissinger sent an internal letter to all employees, announcing Intel's many plans for the next stage, including setting up an independent subsidiary for the IFS business, planning to cut costs by $10 billion by 2025, laying off 15,000 employees by the end of the year, and selling real estate.
Plans cannot keep up with changes. While Intel is busy with reform, rumors are spreading like wildfire.
For example, there was news that Intel planned to sell its programmable chip subsidiary Altera, but Kissinger later denied the news and reiterated that he would continue to push Altera to complete its IPO in 2026. Then, the market heard that Intel was about to sell part of its shares in Mobileye, a provider of autonomous driving systems, and the company had to deny that it had no such plan at present.
In addition, at the end of August, it was reported that Qualcomm was preparing to acquire Intel's PC chip design business. The market obviously thought this was good news, and Intel's stock price rose sharply by more than 9% that day. And there is a precedent for this. For example, in 2019, Apple acquired Intel's modem division for US$1 billion.
So is it possible to buy the entire package and then sell it off separately? This operation does exist. For example, at the beginning of this year, our peer Broadcom demonstrated this operation.
On February 26, KKR announced that it had signed a definitive agreement with Broadcom to acquire its End-User Computing Division ("EUC Division") for a transaction value of approximately US$4 billion. After the transaction is completed, the EUC Division will operate independently as a company.
EUC was originally a division of VMware, a virtual software service provider. In November 2023, Broadcom officially announced the completion of its acquisition of VMware, with a transaction size of approximately US$69 billion, including a US$61 billion contract purchase price and US$8 billion in debt. In 2004, VMware was acquired by EMC and became its wholly-owned subsidiary. It was then divested after EMC was acquired by Dell in 2016.
In short, this kind of operation of splitting and selling after acquisition is normal. But although Broadcom and Qualcomm are both named after the same generation, they cannot be compared. Broadcom made its fortune through mergers and acquisitions, and six years ago it made a sky-high acquisition offer of $130 billion to Qualcomm, but the deal was ultimately rejected by US regulators.
All the above-mentioned pessimism about Qualcomm's acquisition of Intel may be prejudices. Moreover, there are also people who are optimistic about this deal.
Some market analysts pointed out that although Qualcomm is the world's largest smartphone processor designer, it has been working hard to expand into more areas, including personal computer chip design, while Intel is still the dominant player in this industry. Moreover, the acquisition of Intel will also give Qualcomm the opportunity to produce chips locally in the United States and make it the largest brand in the PC and traditional server computer market, which is beneficial both politically and in market competition.
Cory Johnson, chief market strategist at Futurum Group, believes that "Intel has manufacturing capabilities; it has a place in data centers and personal computers. Qualcomm has some plans around personal computers, but Qualcomm is largely a smartphone company. Most of their business is making chips for smartphones... This is something Intel has missed for decades," he said. If Qualcomm takes over Intel, it could fundamentally change the company's business.
Finally, the acquisition must be approved by regulators. But some American strategists believe that in this case, "security interests may outweigh antitrust concerns."
Note: The cover image is from the Douban movie "Royal Cop 007"
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