The world’s top CPU manufacturer Intel has finalized a deal to acquire chip maker Altera for $16.7 billion in cash. Through the acquisition world’s biggest chipmaker seeks to cope with the slowing demand from the PC industry by growing its line-up of higher-margin chips used in data centers.
San Jose-based Altera designs and builds field programmable gate arrays or Field Programmable Grid Array (FPGA) chips that can be programmed to perform various specific tasks. Since these chips do not demand too much space or too much power as common conventional microprocessor would do, it is believed to become very popular soon in the data centers. Microsoft is already using these chips in Bing search engine to power them. Now buying Altera will allow Intel sell wide variety of chips through its existing sales channels and also generating some savings through strategic job cuts. Just like the recently happened Avago-Broadcom deal, Intel and Altera is a consolidation move.
“The acquisition will couple Intel’s leading edge products and manufacturing process with Altera’s leading field-programming gate array (FPGA) technology,” said Intel in a statement. It also mentioned, “The combination is expected to enable new classes of products that meet customer needs in the data center and Internet of Things (IoT) market segments.”
Apart from the enhancement of FPGAs in the datacenter through the deal, the news about attracting Altera IP into the Intel fab house is also interesting. Currently, Intel is the champion of placing transistors on a piece of silicon and its potential to put a huge amount of transistors on a chip means FPGAs will become even more stronger which means more gates, more blocks and more memory. The strongest Altera FPGAs are designed with 28nm process; theoretically speaking, Intel is capable of doubling the number of gates with the 14nm process used on the new Broadwell CPUs. This is most likely to tear apart the Altera’s rival Xilinx.
For Intel this also shows a chance to further expand in the markets they cover. The PC and server market has continued to treat the company well, even as PC sales have slowed, but being on a lookout to position itself in the mobile market from ARM and its partners, Intel has been waiting for avenues to branch out. In this case, FPGAs represent a high margin business on their own, one that increases revenue and works on the advantage for its traditional manufacturing market.
In this deal, Intel pays $54 per share in cash for Altera which is 11% more than the company’s closing price on Friday. Altera’s shares were traded for $51.78 which is below the offer price, during the trade. According to Thomson Reuters data, the deal valued Altera about nine times more than the revenue. “It seems very high to me,” said Stifel Nicolaus & Co analyst Kevin Cassidy. He also added, “The last one I remember that was close was Broadcom buying NetLogic at eight times forward revenue, and that did not turn out very well for Broadcom.”
Intel Chief Financial officer Stacy Smith stated, the merging of Altera’s chip with Intel will give its customers a new range of products that are capable of improving the performance and offer more flexibility at much lesser cost. “That’s the piece that’s pretty exciting about it.” This transaction is the third biggest in the highly fragmented chip industry this year.