Intel-Altera Deal Marks Second Big Chip Company Merger In Less Than A Week

This morning Intel confirmed it had bought Altera, maker of programmable chips, for $16.7 billion. That may seem like a big number until you consider that Avago Technologies Ltd. bought wireless-chip maker Broadcom last week for $37 billion.

It’s a good week to be in the chip business.

According to published reports, the deal has been in the works for months, but perhaps the Avago-Broadcom sale pushed it along a bit. Whatever the reason, Altera stock holders walked away a happy bunch.

Market Perspectives

Every public purchase comes with a premium attached, and these two cases are no exception to that rule. Altera is up a strong 6 percent in regular trading today, pushing its valuation to just over $15.5 billion. Broadcom, to its credit, saw its shares spike from just over $47 per share, to comfortably over $55. That delta works out to 17 percent.

What this indicates is simple: Larger firms are more than willing to shell out for smaller companies in the semiconductor space. Concentrated periods of acquisition activity can come on the heels of a host of causes — in this case, a consolidating market can be fueled by large cash positions, changing technologies, and consistently pressured margins. Intel, for example, has done masterful — if occasionally anti-competitive — work to retain its colossal market share in the PC market. At the same time, its work in mobile systems remains nascent. Altera, conversely, is noted for its higher-margin products.

The rise of cloud computing, let alone the mobile explosion that brought ARM-based systems into greater prominence, has shifted the chip market. And akin to Facebook staring down the barrel of WhatsApp, sometimes monied incumbents pull the trigger on large deals to ensure that they remain monied incumbents.

A parlor game: Ask yourself what chip company that was in direct competition with Altera or Broadcom remains unpurchased. Then decide what firm in the space could afford their sticker price. Consolidation is often like a sneeze, after all: First you, and then me.

Offensive And Defensive

When you begin to dig into the deal, there are a couple of core reasons for Intel going after Altera, which Mark Hung, a Gartner analyst who covers the chip industry, characterizes as both offensive and defensive.

On the offensive side, Intel controls the compute part of the chip market, but it’s been looking to get more into the communications side, where it has a small billion dollar business, mostly in semiconductors. Altera, on the other hand gets almost half its revenue from communications, and the deal gives Intel access to a broader communications market, Hung explained. It fills in a missing piece for Intel.

The second area is networking where Intel desperately wants to keep large customers like Google and Facebook with enormous compute requirements and prevent them from going into the custom chip-making business. Intel dominates the server CPU business, but Altera gives it a specialized server acceleration technology that provides a performance boost when using Intel tools. And Intel wanted this technology to gives it another level of differentiation in the market that will help maintain its dominance and keep these larger customers in the fold.

The final reason was defensive, Hung said. Altera was a major customer of Intel’s fledgling chip foundry business and there were rumors it was going to use a competitor for its next generation chips. Intel want to prevent that embarrassment and buying the company solved that problem.

Intel and Altera have been business partners to this point, which should help ease the transition as they combine companies. According to Intel, it plans to fold in Altera as a business unit to continue to support the Altera customer base (as well as presumably find new ones). Intel also announced it will continue building Altera’s ARM-based and power management power product lines.