After missing second-quarter earnings expectations and seeing its stock fall over 50% so far this year, Intel (INTC) is still attracting interest worth billions of dollars.
Chipmaker Qualcomm (QCOM) is reportedly interested in taking over the chip pioneer in a deal that could be worth $90 billion, the Wall Street Journal reported last week. And alternative asset manager Apollo Global Management (APO) has also offered an equity-like investment that could be worth as much as $5 billion, according to Bloomberg.
By taking over Intel, Qualcomm could potentially scale, gain leadership in the market for mobile, PC, and server core processor units, or CPUs, and have access to Intel’s sprawling chip fabrication plants, analysts at Bank of America (BAC) Global Research said in a note. They added that combining Qualcomm’s chip revenue of $33 billion with Intel’s $52 billion revenue would make Qualcomm the largest semiconductor company in the world.
However, the analysts said regulatory and financial challenges from a potential deal would outweigh those benefits, and added they are skeptical of a proposed takeover, and believe confusion over the deal could end up benefitting Intel’s rivals, including Advanced Micro Devices (AMD) (AMD), Nvidia (NVDA), and Arm.
Here are three reasons Bank of America and other analysts say Qualcomm wouldn’t benefit much from an Intel takeover.
Intel and Qualcomm focus on different chips
A deal between a chip designer and a company with the factories to make those chips looks sensible from above, Richard Windsor, founder of research firm Radio Free Mobile, said in a note — but it doesn’t actually “fit so well.”
While Qualcomm uses British chip firm Arm’s architecture for its PC chips, Intel’s x86 processors, which are used in a lot of computer and server hardware, are designed differently. Bank of America analysts also noted the difference, saying Qualcomm’s “existing established relationships” on the Arm architecture make “it tougher to bring product” to Intel’s mostly x86-based fabs.
Meanwhile, Windsor said Intel’s x86 processors are “under assault on all fronts from Arm and accelerated computing,” and that Qualcomm has already spent two decades competing against Intel’s chips in the mobile and PC market.
“Consequently, it makes no sense to become the owner of a fading titan when one is in a good position to partially or completely displace it from the market,” Windsor said.
And Qualcomm already has a relationship with other chipmakers such as TSMC (TSM) and Samsung, Windsor said, meaning it already knows “how to design its chips to be optimally manufactured on these processes.” Therefore, having to redesign its chips to be manufactured by Intel, which has already slipped behind with cutting edge chips, “sounds like a risky proposition to me,” he said.
It would be an expensive takeover
If Qualcomm does go through with an acquisition, it would come at a premium to Intel’s current expected value of $87 billion, Bank of America analysts said, adding that Intel also has about $53 billion in debt. Meanwhile, Qualcomm has $13 billion in cash on its balance sheet, analysts said.
Intel is also planning to spend billions to support a growing fab network, including a five-year, $100 billion expansionplan for plants in Arizona, New Mexico, Ohio, and Oregon. While the chipmaker is expecting to receive almost $20 billion in direct federal funding and loans from the U.S. CHIPS and Science Act to support the effort, it makes up a small portion of how much the expansion plan is expected to cost. Meanwhile, the chipmaker recently saw its shares close on a high after the U.S. Department of Defense and U.S. Department of Commerce announced that it is eligible for a separate $3 billion in CHIPS Act funding under the Secure Enclave program.
Windsor also said in his note that “Qualcomm would almost certainly pay for Intel with shares” which would lead to “dilution for existing holders of Qualcomm’s stock” (which includes Windsor). And while Intel’s shares have fallen this year, Windsor said it’s still “not cheap” due to the chipmaker’s falling revenue.
The regulatory environment is too tough
Bank of America analysts said the potential deal faces a “tough regulatory environment, specifically in China,” where medium sized deals have, in the past, “taken years to even consider.”
Therefore, analysts said, the potential to dominate the CPU market would actually work against a takeover, because it could face regulatory challenges. For example, the analysts noted Qualcomm’s failed acquisition of Dutch semiconductor company NXP (NXPI) in 2018, after it did not receive approval from China’s antitrust regulator.
