Intel Corp.'s on-again-off-again attempt to buy Altera Corp. is
on the cusp of succeeding, as the chip maker prepares to announce
the roughly $17 billion acquisition Monday, a move that would allow
it to boost revenue and help defend a crucial business.
Altera stockholders will receive about $54 a share, people
familiar with the matter said, around the price the company
rejected in April during an earlier round of talks.
There is, as always, a chance the deal could fall apart at the
last minute.
The expected price is 56% higher than the one at which Altera
traded before The Wall Street Journal first reported talks between
the companies on March 27. Altera's shares closed Friday at
$48.85.
Intel's bid continues a consolidation wave in the semiconductor
industry—a particularly active sector for deal making of late in a
red-hot year for mergers and acquisitions—as companies search for
new sources of revenue growth and target chip makers finding it
hard to boost profitability on their own. Avago Technologies Ltd.
on Thursday announced a $37 billion deal to buy Broadcom Corp., the
largest technology acquisition on record.
Some of the potential buyers have ample cash reserves as well as
the opportunity to borrow at relatively low interest rates. Intel,
as of March 28, reported about $14 billion of cash and short-term
investments, plus about $8.2 billion in long-term investments.
Besides adding product lines to generate more revenue, buyers
are attracted by benefits such as the possibility of pushing more
chips through sales channels that stay about the same size,
yielding expense savings amid an increase in the cost of designing
and manufacturing new chips.
The companies in the latest transaction are already partners.
Intel's factories churn out some high-end semiconductors for
Altera, which designs chips but turns to external manufacturers to
make them.
Intel, the kingpin of processor chips, is expected to use the
smaller company's line of programmable chips to get revenue growth
amid a slowdown in personal-computer demand that is crimping its
own growth.
Altera's business is also widely seen as a way for Intel to
protect its stronghold in chips for server systems, a market that
generated more than half of Intel's operating profit in the quarter
ended in March. Companies have lately been using chips from Altera
and rival Xilinx Inc. to help speed up their servers, and some
analysts believe Intel needs to have an internal source of the
technology to respond to the trend.
Talks between the companies broke off in April, when Altera
rejected an offer from Intel around $54 a share, people familiar
with the matter have said. Altera's decision angered some of its
major investors, who were skeptical that the company could reach
such a price any time soon based on its own efforts. Talks then
resumed in May, people familiar with the situation said.
Intel, based in Santa Clara, Calif., is known for
general-purpose microprocessor chips that can be programmed to
perform a near-infinite variety of computing tasks. But some kinds
of operations—such as converting a video from one format into
another, or encrypting data so unauthorized people can't read
it—can be executed more quickly using circuitry that is
custom-tailored for the specific task.
Some big electronics companies still design custom chips for
their products. But the cost of doing so has risen steadily over
the years, so the practice only makes sense for hardware makers
that have large sales volumes that will generate a return for their
design investment.
Altera, along with Xilinx, popularized a middle path. They sell
chips called field-programmable gate arrays, or FPGAs, that are
configured by customers after the chips leave the factory. Each
chip contains blocks of circuitry for specific kinds of processing
or data-storage jobs, and programmers can select and arrange how
electrical signals travel between them.
The result isn't as fast as a specialized chip designed from
scratch but has long been an attractive option in certain
markets—particularly in hardware such as cellular base stations and
switching systems. And a newer trend—using FPGAs alongside server
systems in large data centers—is making the technology particularly
important for Intel's future.
Intel sells more than 90% of the chips used in servers, the
mainstay for jobs such as email and Web pages. While the company
gets most of its revenue from chips for personal computers, its
Xeon server chips are much more profitable. So Intel has an
incentive to go to great lengths to keep server buyers happy.
Some of those companies, particularly Wall Street investment
banks and big Web services, have been experimenting with non-Intel
technologies to carry out computing chores faster or with lower
power consumption. International Business Machines Corp. is working
with a series of partners to try to position its Power chips for
Web applications. Users of technology from ARM Holdings PLC, the
standard in smartphones, are also trying to penetrate the data
center.
Still another tack is to use FPGAs along with Intel's chips or
other processors to speed up computing jobs.Microsoft Corp., for
example, has been testing the use of Altera FPGAs to get answers
faster with its Bing search engine.
Intel has responded to the technology changes in several ways,
including customizing chips for some big customers and packaging
its Xeon chips with FPGAs. But there is another approach that could
pose an even bigger threat in the future, analysts say—putting a
processor and an FPGA on one piece of silicon, which allows much
faster communications than putting two chips next to each
other.
Altera and Xilinx have recently been offering customers FPGAs
that have ARM processors embedded in them. Intel, to help get
comparable speed benefits and counter rivals like ARM, needs to be
able to sell chips that have a similar combination of processor and
FPGA technology, some analysts say.
Write to Dana Cimilluca at dana.cimilluca@wsj.com, Dana Mattioli
at dana.mattioli@wsj.com and Don Clark at don.clark@wsj.com
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