Intel Corp. has agreed to purchase Altera Corp. for $16. 7 billion. Intel is the world’s biggest chipmaker seeking to overcome the falling demand in the PC industry through expansion of their line-up for higher-margin chips needed in data centers (King N. Pag). Through the purchase Intel is seeking to expand their business beyond chips for computers and servers. Intel Corp. has agreed to purchase Altera Corp. to defend their data center presence, by forging a deal that will help Intel to consolidate the chip making industry. By adding Altera, Intel would bundle their processing chips, with Altera’s programmable chips, which can help to increase the speed of Web searches. Intel also looked at other options, but Altera offered the best option for creating shareholder value. On June 1, 2015, Altera and Intel announced a definitive agreement where Intel would purchase Altera at $54 per share. This move highlights Intel’s attempt to horizontal diversify by pursuing a set of similar tangible and intangible products in Altera (DiChristopher N. Pag).
Like other chipmakers, Intel seeks to manage the rising costs and contend with growth; at the same time they are also trying to defend their profitable source of business. The purchase of Altera will increase the non-GAAP EPS (earning per share) and ensure business has cash flow in their first year together. The deal is going to get funded by debt and cash. Altera has earlier rejected another bid from Intel, spurring few shareholders to pressurize Altera and reconsider their offer, as the offer valued Altera above its market valuation. Intel themselves has been searching for growth areas since 2011, after the PC market growth started to struggle. Altera chips have been used in several markets, ranging from consumer electronics to communications. Altera’s devices can also have their function upgraded, even after being installed in the end-devices. While they are sold in fairly small numbers, programmable logic mostly requires the latest production technology as it’s has the largest programmable chips in the chip making industry. Altera and Intel were already working together to build an experimental computer motherboard, which includes the traditional Intel chips and the FPGAs by Altera (King N. pag).
Acquisition of Altera can help Intel extend and defend their most profitable business of supplying server chips to data centers. Semiconductor sales for PCs have been declining as more and more consumers have started to depend on smart phones and tablets to get online. Data centers need to provide services and information for mobile devices. This will help Intel to drive orders for High-end processors and shore up the organization’s profitability. As the part of Intel, Altera will support designs that combine Altera Chips and other designs of ARM Holdings plc. technology. According to David Garrity of GVA Research, “ Intel’s interest in Altera is more likely due to its need to strengthen its technology portfolio” (DiChristopher N. pag). Intel is acquiring the business as they will avoid investing in building the technology; rather they are buying an organization that owns the intellectual property. There are several factors that prefer consolidation of the semiconductor industry: the increasing relevance of data centers, low interest rates, available funding and improved sector revenue growth. The integrated circuits of Altera that use field-programmable gate array technology provide Intel, an opportunity to better their chip performance at a vaguely higher cost.
The acquisition allows Intel to combine their manufacturing process and leading edge products with Altera’s leading FPGA (field-programmable gate array) technology. The combination of these technologies is expected to create several new products, which meet the customer needs in the Internet of Things (IoT) and the data center market segments. Intel is planning to offer the FPGA products of Altera with the Xeon® processors of Intel as highly integrated and customized products. Intel is also expected to improve Alterna products with their manufacturing and design capabilities. The programmable chips offered by Altera allow Intel to enhance Xeon server chips’ computational capability, which might be threatened by the Avago-Broadcom merger. Intel’s CEO Brian Krzanich has said, “ Intel’s growth strategy is to expand our core assets into profitable, complementary market segments, with this acquisition, we will harness the power of Moore’s Law to make the next generation of solutions not just better, but able to do more” (Gensler N. pag).
Intel’s acquisition of chip maker Altera is an example of Horizontal diversification of an organization. There are several causes that have prompted Intel to overpay for Altera. Intel needs to increase their business beyond chips for servers and computers. Altera chips are already sold to different markets, ranging from consumer electronics industry for the communications industry. Altera will be an opportunity for the business to indentify growth areas and place their superior technology to serve the customers. Also, the acquisition of Altera ensures Intel can still supply chips to data centers. Overall, this business deal will help Intel to strengthen their technology portfolio through the addition of FPGA chip technology to their portfolio.
DiCristopher., T. Why Intel needs to buy Altera: Expert. CNBC. cnbc. com. 1 June 2015. Web. 20 July 2015.
Gensler., L. Intel Buying Chipmaker Altera For $16. 7 Billion. Forbes. Forbes. com. 1 June 2015. Web. 20 July 2015.
King., I. Intel’s $16. 7 Billion Altera Deal Is Fueled by Data Centers. Bloomberg. Bloomberg. com. 1 June 2015. Web. 20 July 2015.