Intel and Qualcomm Review- Does a merger make sense?

The past couple of weeks have been eventful for Intel (INTC) and its shareholders, as the company finds itself at the center of several major developments. Among the most significant is the recent report from the Wall Street Journal, which revealed that Qualcomm (QCOM) has approached Intel about a potential friendly takeover. If such a deal were to materialize, it would mark the largest technology acquisition in history, surpassing Microsoft's $69 billion acquisition of Activision. Intel's stock responded positively to the news, reflecting market speculation about the potential benefits of such a merger. However, it has had difficulty holding gains suggesting some trepidation among investors. 

This possible acquisition follows a series of noteworthy events for Intel, including a major win with Amazon Web Services (AWS), which bolsters Intel's Foundry business, and the announcement of significant government support through loans from the Inflation Reduction Act. These developments highlight Intel's ongoing efforts to restructure and revitalize its business, particularly as it faces intense competition in the data center market from companies like NVIDIA and AMD. Intel's struggles have left it vulnerable, making it an attractive target for acquisition.

Qualcomm's interest in Intel isn't entirely surprising given the latter's recent challenges. The deal could potentially provide Qualcomm with valuable assets, particularly in the PC and server markets, where Intel has a strong presence. However, any acquisition would likely face scrutiny from antitrust regulators, especially considering Intel's size and influence in the semiconductor industry. Moreover, Qualcomm's own challenges, including a slump in its core handset market, add another layer of complexity to the potential deal.

In the following analysis, we will take a deeper dive into the details of this rumored acquisition. We will explore whether such a deal makes strategic sense for Intel, Qualcomm, and the semiconductor industry as a whole. We will also examine the potential regulatory hurdles, the impact on the companies' financials, and how this move could reshape the competitive landscape of the tech sector.

Intel- The Struggle is Real

Intel's recent troubles have marked a dramatic decline for what was once the world's largest chipmaker. Over the past several years, the company's share price has fallen by more than 50%, with a significant drop in 2024 alone, as it struggles to keep pace with its rivals. In August, Intel lost nearly $30 billion in market value following a disastrous earnings report where CEO Pat Gelsinger announced 15,000 job cuts and the suspension of its dividend. The company is now facing increasing pressure from potential bidders and hostile shareholders, with its valuation and market position severely weakened.

One of the core challenges Intel faces is its ambitious and costly attempt to establish a competitive foundry business. Despite the significant capital expenditures required, Intel has encountered multiple operational setbacks in its efforts to build and expand its manufacturing capabilities. The company's plans to transform its manufacturing arm into a wholly owned subsidiary reflect its commitment to this strategy, but it also highlights the difficulties Intel is experiencing in trying to regain its footing in a rapidly evolving semiconductor industry.

The competition has been relentless, with rivals like NVIDIA and AMD outpacing Intel in key markets, particularly in AI chips and data centers. NVIDIA's dominance in the AI boom and AMD's gains in both desktop and laptop markets have further eroded Intel's market share. These challenges have been compounded by the departures of high-profile executives and a series of missed opportunities in emerging technologies, leaving Intel struggling to keep up with industry advancements.

Source: Intel

In response to these pressures, Intel has undertaken a significant restructuring effort, including job cuts and the shelving of certain expansion projects. The company is also grappling with the immense capital expenditures needed to build out its foundry business, which many analysts remain skeptical about. Despite these efforts, Intel is headed for its third consecutive year of shrinking sales, and its future remains uncertain as it navigates the intense competition and operational challenges that have plagued its recent history.

Source: Intel

Does the deal make sense for Qualcomm?

Qualcomm's potential acquisition of Intel has sparked significant interest and debate within the tech industry, particularly regarding whether such a move makes strategic sense for Qualcomm. 

Acquiring Intel would instantly position Qualcomm as a leader in the PC and laptop markets through Intel's dominant x86 chip business. This acquisition would be a major boost to Qualcomm's ongoing efforts to diversify its revenue streams beyond its core, and highly seasonal, handset market. For a company that has been exploring growth opportunities outside of mobile devices, this deal could significantly accelerate Qualcomm's expansion into the PC sector.

Source: Qualcomm

However, Qualcomm is already making inroads into the PC market with its ARM-based Snapdragon CPUs, which have gained some traction as a competitive alternative to Intel's offerings. Qualcomm's existing strategy focuses on leveraging its strength in mobile technology to create Apple-like experiences in the PC market, emphasizing speed and battery life. Therefore, a full acquisition of Intel's PC business could be seen as a drastic and potentially disruptive shift in strategy, especially considering Qualcomm's recent momentum in this space. Additionally, Qualcomm traditionally operates as a fabless company, meaning it designs but does not manufacture its own chips. Acquiring Intel, which has extensive manufacturing operations, would require Qualcomm to adapt to a new business model, potentially complicating the integration process.

One potential strategy for Qualcomm could be to bid only for parts of Intel's business, such as its chip design division for PCs and servers, while avoiding the complexities of Intel's manufacturing and foundry operations. The PC market remains substantial, with a total addressable market (TAM) of approximately $33 billion (excluding Apple), and Intel currently holds around 82% of this market. By acquiring Intel's design business, Qualcomm could solidify its position in the PC and data center markets, where Intel's x86 architecture still dominates despite increasing competition from AMD.

The data center market is another lucrative area where Qualcomm could benefit from Intel's expertise. The x86 server market alone has a TAM of about $19 billion, with Intel holding a significant share. Although Qualcomm has attempted to enter the server market with its ARM-based solutions, it has struggled to gain significant traction. Acquiring Intel's server chip design business could provide Qualcomm with the assets needed to make a more substantial impact in this space, particularly as the demand for AI-driven data center technologies continues to grow.

Source: Global Market Insights

However, the most significant challenge for Qualcomm in acquiring Intel lies in the foundry business. Intel's foundry operations have been losing money, with a reported $7 billion loss in 2023, and they require substantial capital investments. Qualcomm, as a fabless company, would need to decide whether it wants to take on the complexities of chip manufacturing or whether it should spin off the foundry division. The foundry business is critical to the U.S. government's efforts to bring advanced semiconductor manufacturing back to the U.S., but it may not align with Qualcomm's core competencies or strategic goals.

While the acquisition of Intel could offer Qualcomm significant benefits in the PC and data center markets, it also presents substantial challenges, particularly with regard to the foundry business. Qualcomm must carefully weigh the potential synergies against the risks of integrating such a complex and capital-intensive operation. As the tech industry watches closely, the outcome of this potential deal could reshape the landscape of the semiconductor market and determine Qualcomm's future trajectory.

Does Intel need to make a deal?

Intel has been in the news for the QCOM offer as well as government bids. But there were two other news stories which will bolster the company as it moves through its restructuring phase.

Apollo Global Management Inc. has reportedly offered to make a multibillion-dollar equity-like investment in Intel Corp., signaling strong confidence in Intel's ongoing turnaround strategy. The proposed investment, potentially as much as $5 billion, comes at a critical time for Intel as it navigates significant challenges and opportunities in the semiconductor industry. This move by Apollo could provide Intel with much-needed capital to support its restructuring efforts and bolster its manufacturing capabilities as it competes with industry rivals.

The offer from Apollo follows recent news that Qualcomm has also shown interest in Intel, floating the idea of a friendly takeover. This raises the stakes for Intel, as it contemplates different strategic paths forward, each with significant implications for its future. The potential investment from Apollo would not only bring in substantial funding but also serve as a vote of confidence in Intel's ability to execute its turnaround plan amidst intense industry competition.

Intel and Apollo already share a business relationship, having recently collaborated on a joint venture involving a plant in Ireland, where Apollo invested $11 billion. Apollo's experience in the chipmaking space is further highlighted by its $900 million investment in Western Digital Corp. last year. These prior engagements suggest that Apollo is well-positioned to support Intel's strategic goals, particularly as the company works to expand and modernize its factory network.

In addition to the APO rumors, Intel's recent deal with Amazon Web Services (AWS) marks a significant milestone in the chipmaker's turnaround efforts and offers several advantages for Intel. The agreement will see Intel supplying custom Xeon 6 server CPUs and AI chips to AWS, which will be produced at Intel's advanced 3 and 18A fabs. This partnership not only reinforces Intel's position in the server and AI chip markets but also provides a much-needed boost to its Foundry Division, which had been struggling with a stagnant backlog. The deal with AWS could add to the Foundry's backlog and help restore confidence in Intel's ability to compete with industry giants like AMD and NVIDIA.

For Intel's Foundry business, this partnership with AWS is a crucial step forward. The Foundry has been a significant drag on Intel's profitability, with operating losses of $2.8 billion in Q2 and $8 billion over the past four quarters. However, the AWS deal aligns with Intel's long-term goals for the Foundry, aiming to achieve a 40% gross margin and a 30% operating margin by 2030. While this partnership is a positive development, it raises questions about Intel's ability to scale the Foundry business to meet these ambitious targets, especially as the company continues to rely on external funding and partnerships, such as the $11 billion investment from Apollo in its Fab 34 in Ireland.

Despite the positive momentum from the AWS deal, Intel's Foundry business remains under scrutiny, particularly regarding its readiness for a potential spin-off. While some industry observers might see this partnership as a precursor to a Foundry spin-off, Intel's financial position suggests that the division is not yet ready for such a move. The company still faces significant challenges in improving the Foundry's profitability and ensuring that it can operate independently without relying on subsidies from Intel's other divisions or government support. The AWS collaboration, while promising, may not be sufficient to address these broader concerns.

Industry analysts are also closely watching how this deal impacts AWS's commitment to its custom Graviton chips and other accelerator technologies like Trainium and Inferentia, which have been perceived as competition to Intel and other industry leaders. While there may be some concerns about how this partnership will affect AMD and other competitors, the immediate focus is likely to be on Intel's ability to capitalize on this opportunity and regain market share in the server and AI chip markets. For Intel investors, the AWS deal offers a glimmer of hope that the company can turn the corner, but sustained improvement in execution and margins will be necessary to drive long-term value.

Overall, the AWS deal is a significant win for Intel, providing validation for its advanced process nodes and Foundry capabilities. It also signals that Intel is still a formidable player in the AI chip market, capable of competing with the likes of TSMC. For Intel shareholders, this partnership represents a positive development, but it is only one piece of the puzzle in the company's broader turnaround strategy. Continued progress in the Foundry business, coupled with effective cost management and execution, will be crucial in determining whether Intel can fully recover and reclaim its leadership position in the semiconductor industry.

Would the deal pass regulators? 

A potential merger between Qualcomm (QCOM) and Intel (INTC) would undoubtedly face significant regulatory challenges and scrutiny. The deal would bring together two of the largest semiconductor companies in the world, raising concerns among regulators about the potential for reduced competition in the industry. The current regulatory environment, particularly under the leadership of Lina Khan at the Federal Trade Commission (FTC), has been increasingly hostile toward large mergers and acquisitions, especially in the tech sector. Given this context, it's unlikely that the FTC would easily approve such a merger without substantial concessions.

One of the primary arguments in favor of the merger would likely center around the need to strengthen U.S. chipmakers in their competition with Chinese manufacturers. The Biden-Harris administration has heavily invested in Intel through the CHIPS Act, with Intel receiving $3 billion in funding as part of a broader $22.5 billion package of grants and loans aimed at revitalizing domestic semiconductor manufacturing. However, Intel's recent struggles, including the sale of significant stakes in its fabs and the subsequent impact on its gross margins, complicate the picture. The government may be hesitant to approve a deal that could potentially disrupt Intel's strategic importance as a national champion in the semiconductor race.

Antitrust concerns would also be a major hurdle for the deal. The combined market capitalization of Qualcomm and Intel would be substantial, and while the merger might not immediately create a monopoly in any single market, it would certainly raise questions about market concentration, particularly in the PC and smartphone chip markets. Regulators could demand significant concessions or guarantees, particularly regarding Intel's Foundry business, to ensure that competition remains robust and that the deal does not undermine the objectives of the CHIPS Act.

Another complicating factor is the global nature of semiconductor regulation. Even if U.S. regulators were to approve the deal, it would still need to pass scrutiny in other key markets such as China and the European Union, where regulatory bodies may have different concerns and priorities. Given the current political climate and the increasing focus on national security and technological sovereignty, it's difficult to imagine a smooth path to approval for such a high-profile merger. Investors should remain cautious about the likelihood of the deal proceeding, as the regulatory challenges appear to be a significant and potentially insurmountable obstacle.

Will the deal happen?

The potential acquisition of Intel (INTC) by Qualcomm (QCOM) appears highly unlikely from both strategic and regulatory perspectives. Analysts at Benchmark highlight that while Qualcomm may have an interest in parts of Intel, particularly its chip design business focused on the PC, notebook, and server markets, the overall deal seems impractical. Qualcomm lacks experience in running leading-edge semiconductor manufacturing facilities, which would likely necessitate the immediate sale of Intel's manufacturing operations. This aligns with calls for Intel to separate its manufacturing and design businesses, a process the company has already begun. The possibility of finding a buyer for Intel's fabs, such as the U.A.E.'s Mubadala, has been suggested, but even then, the deal faces significant obstacles.

From a regulatory standpoint, the deal would face intense scrutiny, and the complexities of merging the two companies could lead to delays that might allow foreign rivals to gain an advantage. Analysts believe that while Qualcomm's interest is a positive development for Intel, the acquisition would almost certainly exclude Intel's foundry business, which is already on a path towards being spun off. The expression of interest might have accelerated Intel's decision to make the foundry an independent subsidiary, potentially setting the stage for future moves, but a full-scale acquisition by Qualcomm remains improbable.

Valuing Intel is challenging due to the complexity of its various divisions, equity stakes, and government involvement, especially given the significant losses from its Foundry business and declining performance in its core operations. The erosion in value of assets like Mobileye and Altera further complicates the assessment. Intel's ambitious 2030 plan, which targets significant improvements in gross and operating margins, as well as external Foundry revenues, appears difficult to credibly underwrite. Additionally, Qualcomm might be considering financial scenarios where Intel's cash burn is even more severe, making it unlikely that the deal would warrant a meaningful premium.

The potential acquisition of Intel by Qualcomm offers a promising option for shareholders, particularly if the takeover price is favorable. While Intel has the resources and potential to succeed on its own, especially with recent partnerships like the one with Amazon, Qualcomm's efficient management and complementary business could provide a solid foundation for growth. Intel shareholders might find value in holding Qualcomm shares as part of a potential deal, given Qualcomm's strength and the synergies between the two companies. However, the foundry business remains a significant challenge, and any deal would need to carefully navigate this aspect to be beneficial for both sets of shareholders.

From Qualcomm's perspective, acquiring Intel's design business could be accretive to revenue and earnings, opening new markets that have been difficult to penetrate. Despite Intel's recent struggles, including a sharp decline in share price, there are signs that the company has hit bottom and could present a value opportunity for long-term investors. Intel's strategic initiatives, such as the AI computing advancements and cost reduction plans, offer potential catalysts for a turnaround. While a buyout might provide a short-term boost to Intel's stock, the company appears to be positioning itself for a recovery, making it an attractive option for patient investors.