Don’t count on a megadeal to save Intel

Once the world’s most dominant designer and producer of advanced semiconductors, Intel’s stock price has collapsed this year as its problems have mounted. The company’s disastrous second-quarter report in early August put its market capitalization below $100 billion for the first time since 2012. It also pushed the stock below the company’s book value—largely consisting of factories and intellectual property minus its net borrowings—for the first time in at least four decades, according to data from FactSet.

Such an epic crash understandably draws out bargain hunters looking to kick the tires. The Wall Street Journal reported Friday that Qualcomm has made a takeover approach, though at what price and other terms couldn’t be learned. It wouldn’t exactly be a minnow swallowing a whale; Qualcomm’s projected revenue over the next 12 months is more than three-quarters of what Intel is expected to produce.

Still, even a modest takeout premium would put the deal’s value over $100 billion. That is about eight times the cash on Qualcomm’s balance sheet and would involve substantial debt or significant dilution of the company’s shareholders—or likely both. Wall Street has serious doubts. Qualcomm’s shares fell nearly 2% Monday after slipping nearly 3% Friday.

“We are skeptical of the merits of any potential transaction," wrote Vivek Arya of BofA Securities in a report. Chris Danely of Citigroup was even more direct. “Almost too silly to comment on," he wrote in a note to clients.

But questionable deals still have a way of happening, or trying to happen. And Intel in its current predicament is drawing all types of interest. Bloomberg reported over the weekend that distressed investment specialist Apollo Global Management has offered to buy an equity stake of up to $5 billion in the chip maker. That could end up being a more plausible option given Intel’s cash needs and less likelihood of regulatory hurdles. Intel’s share price rose more than 3% Monday.

A full acquisition, though, poses all sorts of problems for a buyer, whether it is Qualcomm or anyone else. Intel is essentially two businesses now—a semiconductor design shop and a chip manufacturing operation. A restructuring announced earlier this month further solidified the move, but it has been under way for the past three years, ever since Pat Gelsinger came back aboard the company as chief executive and began leading an ambitious turnaround plan to regain the company’s lead in manufacturing technology while also building a foundry business to produce chips designed by other firms.

It has been an expensive undertaking. Intel’s foundry operation lost $5.3 billion in the first six months of this year, while 99% of its revenue is coming from Intel’s own internal needs. The expense of catching up its manufacturing tech caused the once-flush Intel to burn through about $12.6 billion in cash over the past four quarters. Wall Street expects the annual cash burn to continue through at least next year, according to FactSet estimates.

And the design side of the business isn’t faring much better. Personal computers and data center servers still generate the bulk of Intel’s chip sales. Revenue growth on the PC side has improved a bit over the past two quarters as industry sales have pulled out of a slump, but Intel’s data center business has been decimated by the shift in spending to Nvidia’s artificial-intelligence systems. Intel is still the dominant vendor in CPU chips for both PCs and servers, but it has lost valuable share in both segments to rival Advanced Micro Devices. Mercury Research estimates Intel’s share in server CPU chips was 75.6% in the first half of this year. Intel had 99% of that market in 2017.

Hence, any buyer would need the ability to solve multiple existential threats while also getting such a deal through regulators that would include China, given the company’s facilities there. That alone makes a full Intel buyout far less likely; China has already stymied several large deals involving U.S. tech firms that include both Intel and Qualcomm. Of China, Stacy Rasgon of Bernstein noted Monday that “a weaker Intel and a weaker US semiconductor manufacturing footprint is probably better for them."

Intel certainly needs more friends these days, but buyers will be hard to come by.