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Intel To Buy Altera For $16.7 Billion In Its Biggest Acquisition Ever

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Intel, struggling to stay afloat in an electronics world dominated by smartphones and tablets, is all set to buy rival chip maker company Altera (via Reuters) which deals in programmable chips, in a bid to revive and re-invent itself to suit modern electronic needs.

The buy-out will be for a massive $16.7 billion dollars, with Intel offering $54 per share in cash. This news broke out on Sunday by people familiar with the matter and the deal is expected to close in next six- nine months, having been already approved by the Intel and Altera’s Board of Directors. It is now  subject to certain regulatory approvals and customary closing conditions, including the approval of Altera’s stockholders.

The talks of the acquisition first surfaced in early March this year but reportedly Altera refused to agree on price terms which was incidentally the same as the currently finalized deal. The semiconductor chip market has seen tremendous growth in recent times with high processing chips going everywhere in modern appliances.

However due to the high costs associated with the research and manufacturing, businesses have been struggling to make profits.

This has led to the many acquisition in past few months in the $300 Billion semiconducto  industry, with the largest deal ever, being announced last week, when Avago Technologies Ltd. agreed to buy Broadcom Corp. for $37 billion. Then in March, NXP Semiconductors paid $11.8 billion for Freescale Semiconductor, which began life as part of Motorola and specializes in chips for sensors and cars.

Last October, apparently deciding it could no longer afford the increasingly high cost of making chips, IBM agreed to pay $1.5 billion for Global Foundries to take over its manufacturing. Big Blue had also announced it would invest $3 billion in semiconductor research.

Talking about these buy-outs, Stacy Smith, Intel’s CFO says,

This consolidation is driven by economics, You need to have large scale to build your own factories and create these incredibly small products.

Altera reported decline in its sales in the first quarter which led to the reconsidering of Intel’s offer in March. Altera had sales of $435.5 million for the first quarter of 2015, down 6 percent compared to the year-earlier period. Net income for the quarter was also down at $94.9 million from $116.5 million.

Lately, Intel also has been looking for growth beyond the struggling personal-computer market, which has been declining since it peaked in 2011. Intel slashed nearly $1 billion from its first-quarter revenue forecast in March, saying that small businesses were delaying upgrading their computers.

Personal computer shipments fell 5.2 percent in the first three months of this year, extending three years of decline, according to research firm Gartner. Net revenue from Intel’s PC group increased just 4 percent in 2014, generating about 62 percent of total revenue, while revenue in its data center group increased 18 percent, providing just over a quarter of overall revenue.

With the acquisition, which is Intel’s biggest ever, surpassing its $7.7 billion acquisition of security software maker McAfee in 2011, the chip maker company expects to consolidate its position in two of the biggest emerging markets, large data centers and the so-called Internet of Things, or computer-enriched machines that work with other devices.

Brian Krzanich, Intel chief executive, made a renewed focus on manufacturing a key part of the company when he took over two years ago. Altera chips are used in a range of telecoms and wireless equipment as well as military hardware, automotive and industrial applications and networking, and can have their function updated, even after they’ve been installed in end-devices.

While they’re sold in relatively small volumes, programmable logic usually requires the latest in production technology because it’s some of the largest chips in the industry. And this is where Intel comes in with its expertise in manufacturing chips.

Intel said in the statement,

The acquisition will couple Intel’s leading-edge products and manufacturing process with Altera’s leading field-programmable gate array (FPGA) technology. The combination is expected to enable new classes of products that meet customer needs in the data center and Internet of Things market segments.

Specifically, Intel plans to offer Altera’s FPGA products with its Xeon processors as “highly customized, integrated products” and to improve Altera’s products by applying Intel’s design and manufacturing processes to them.

However, the road is not all easy for Intel as many new players are lining up to emerge in the new world of computing. Later this week, Hewlett-Packard is supposed to give an update on  supposedly revolutionary kind of computer server designed specifically for large data centers. Itexpects to introduce the system, called the Machine, possibly as early as 2016.

Governments across he world too, have been investing heavily to meet their supercomputing needs. Two of the biggest announcements in that respect come from, well, who other than India and China. In late 2014, China announced it would spend almost $5 billion on a fund for homegrown semiconductor makers and fabrication plants.


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