Intel close to acquiring Altera in $15 billion deal: Report

29 May 2015 | Author: | No comments yet »

Company Update (NASDAQ:INTC): Avago-Broadcom: Bull and Bear Debate Chip Mania; Intel on the Prowl?.

The deal price could be as much as $54 a share, a 15% premium over Altera’s Thursday closing price of $46.97, the New York Post reported, citing a source close to the situation. “A deal is likely by the end of next week,” the newspaper quoted the source as saying.

Intel (NASDAQ:INTC) needs to acquire Altera (NASDAQ:ALTR) as a mechanism to protect its server business and extend its penetration into data center communications and storage products as well as other markets.Altera (NASDAQ:ALTR)‘s stock had its “neutral” rating restated by investment analysts at Goldman Sachs in a note issued to investors on Thursday. The deal, if consummated, would be the biggest acquisition ever for the $160 billion market cap Intel — and help it move from PC sales into faster-growing sectors like Altera’s data center programmable chips.

CLSA’s Srini Pajjuri notes the rise in short interest: Biggest increases this period: SLAB (+59%), ALTR (+48%), IDTI (+47%), and MPWR (+36%). · In terms of days to cover, VECO (17.1) tops the list, followed by CREE (9.9), NVDA (9.5), and AMD (7.1). Intel signed a standstill agreement earlier this year with Altera that expires on 1 June, giving the world’s largest chipmaker the option to launch a hostile bid after that, Reuters reported in April, citing sources. Altera reportedly rejected an Intel $54 bid just a few months ago and then broke off sales talks, but that was before Altera issued disappointing earnings. Srini Sundararajan of Summit Research Partners thinks Intel (INTC) could be on the prowl: The stellar execution of the integration of AVGO’s acquisition of LSI and Emulex suggests that a potential AVGO-BRCM merger has a fair shot of succeeding. shares are currently priced at 15.53x this year’s forecasted earnings, which makes them relatively expensive compared to the industry’s 10.16x forward p/e ratio.

Since then, we had heard unconfirmed reports that a number of ALTR’s larger shareholders expressed displeasure that the presumed $54/share offer was rejected. According to a consensus of 40 analysts, the earnings estimate of $0.52 per share would be $0.03 worse than the year-ago quarter and a $0.03 sequential decrease. Avago agreed Thursday to pay $37 billion for Broadcom. “A year ago it made sense for Intel to buy Broadcom when it was $25 a share, but not at $60,” said Stacy Rasgon, a senior analyst at Bernstein Research.

As you can see, it grew about 20% for the trailing 12 months ending March 30, 2015, and is expected to generate mid-teens growth for the next several years. Intel’s largest acquisition to date was an $8 billion 2010 pickup of security company McAfee that as of now has not produced clear benefits, Rasgon said.

The reason for the higher margins is that INTC can price based upon value to the customer in an environment that offers little in the way of alternatives. Additionally, the highest growth part of DCG is its cloud customers who are willing to pay more for semi-custom parts that deliver higher performance. It operates through PC Client Group, Data Center Group, Internet of Things Group, Mobile and Communications Group, Software and Services, and All Other segments. The companys platforms are used in various computing applications comprising notebooks, desktops, servers, tablets, smartphones, wireless and wired connectivity products, wearables, transportation systems, and retail devices.

Last fall INTC had 35 custom SKUs (stock keeping units) for cloud customers going to 50 this year and was willing to do full-custom silicon given the volumes the cloud players generate. It offers microprocessors that processes system data and controls other devices in the system; chipsets, which send data between the microprocessor and input, display, and storage devices, such as keyboard, mouse, monitor, hard drive or solid-state drive, and optical disc drives; system-on-chip products that integrate its central processing units with other system components onto a single chip; and wired network connectivity products. However, the second issue is that those same cloud customers and others would certainly love to have an alternative solution that may provide the benefit of price pressure, if only for the benefit of negotiating power. The company sells its products primarily to original equipment manufacturers, original design manufacturers, and industrial and communications equipment manufacturers in the computing and communications industries.

The company has long been known for its manufacturing prowess and that translates into the ability to push its process technology faster than the competition and manufacture in volume on the leading edge. FPGAs consist of logic blocks and memory that can be connected by an engineer at a customer (hence field programmable) to perform a repetitive task that may be common to that customer or application. Analysts at Topeka Capital Markets raised their price target on shares of Altera from $38.00 to $42.00 and gave the company a “hold” rating in a research note on Wednesday, May 20th. Two equities research analysts have rated the stock with a sell rating, nineteen have assigned a hold rating and five have issued a buy rating to the company’s stock.

The Company designs and sells high-performance, high-density programmable logic devices (NASDAQ:ALTR), HardCopy application-specific integrated circuit (ASIC) devices, power system-on-chip devices (PowerSoCs), pre-defined design building blocks known as intellectual property (IP) cores, and associated development tools. The FPGA market is a $4-$5 billion market growing in the high-single digits and is dominated by two companies: Xlinix with about 50% market share, and ALTR with about 30% share.

Receive News & Ratings for Altera Daily – Enter your email address below to receive a concise daily summary of the latest news and analysts’ ratings for Altera and related companies with Analyst Ratings Network’s FREE daily email newsletter. They have been replacing many application specific integrated circuits (ASIC), a $21 billion market and declining, since they arrived in the late 1980s. Both generate solid cash flow yields but, because INTC has wafer fabrication facilities, its free cash flow yield ([CFO-Capex]/Revenue) is substantially lower, but that’s to be expected.

What we see is that value is in the eye of the beholder (it always is or we wouldn’t have the delightful repartee that commentary elicits here at SA). However, let’s throw out some “what ifs.” INTC has $21 billion in cash (net cash $8.6 billion) but is generating about $21 billion of cash from operations each year. Short-term debt coupled with some of the existing cash (say the net position of $8.6 billion) could be used and then paid off with the cash generated by operations. Assuming ALTR’s operations will continue to expand (as FPGAs continue to take market share from ASICs) there is the potential to grow their margins as well by leveraging INTC’s manufacturing. INTC has been doing a solid job of reducing its shares outstanding (returning cash to shareholders) by about 200 million or 4% of the total over the last 12 months.

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