Consolidation in the semiconductor space
The merger of Intel (INTC) and Altera (ALTR) is just one of many in the semiconductor space lately, and M&A (merger and acquisition) activity is heating up. We’re seeing big mergers of Broadcom (BRCM) with Avago Technologies (AVGO) and Freescale Semiconductor (FSL) with NXP Semiconductors (NXPI).
Intel and Altera already have a relationship
Intel (INTC) and Altera (ALTR) have a foundry relationship that began in 2013. The end product will be the Altera Stratix 10, which will use Intel’s 14-nanometer Tri-Gate process and packaging technologies.
Intel also already has a relationship with eight of Altera’s top ten customers. When asked on the conference call about the rationale for buying Altera versus maintaining the current relationship, Intel said it believes Altera needs to be brought in-house and have the two companies’ R&D (research and development) efforts work together.
Data centers and the Internet of Things
Intel believes that pairing its processors with Altera’s field-programmable gate array (or FPGA) will work for applications such as facial recognition and encryption. These chips will be programmable and could be used in new connected automobiles and eventually self-driving cars and trucks. Intel anticipates this combination could increase the addressable market by $1 billion.
Altera’s programmable chips are used to help data centers work more efficiently. Microsoft (MSFT) is using Altera’s FPGAs to improve the performance of its Bing search engine. Other big users could be Facebook (FB) and Amazon.com (AMZN).
Finally, Intel anticipates that it can use Altera’s technology in the growing universe of connected devices, also known as the Internet of Things.
The Intel-Altera merger is expected to be accretive to Intel’s non-GAAP (generally accepted accounting principles) earnings per share and free cash flow in the first year after closing. On the conference call, Intel declined to give the actual expected synergies.
Intel expects 60% of the synergies to be revenue and 40% to be costs, primarily general and administrative. Since Intel and Altera already have a foundry relationship, Intel doesn’t anticipate major capital expenditures.