Why Intel Paid a Premium for a Stake in Cloudera -- WSJ
May 02 2017 - 3:02AM
Dow Jones News
By Rachael King
When Intel Corp. agreed to buy a 17% stake in big-data software
startup Cloudera Inc. three years ago, it purchased the stock for
more than double the share price other investors had paid just two
weeks earlier.
After Cloudera's initial public offering on Friday, Intel's $742
million investment is now underwater, valued at roughly $434
million.
It might appear that Intel stumbled badly. But people familiar
with Intel's thinking say the chip giant agreed to pay Cloudera's
high asking price in March 2014 in part because it would help guard
against an acquisition of the startup by another company.
The resulting $4.1 billion valuation -- compared with $1.8
billion earlier that month when venture investors bought in -- was
bound to scare away prospective buyers. Cloudera's software had
gained popularity with companies analyzing oceans of digital
information in their corporate servers. Intel believed big-data
software was critical to helping it maintain its near-total
dominance of the market for data-center servers.
With a board seat and close ties to the company, Intel could
ensure its chips worked best with Cloudera's software. Critically,
Cloudera agreed to improve the security of its software and add
features to make it more appealing to the corporate market where
Intel needed to fend off competitors.
Intel declined to comment. Cloudera Chief Executive Tom Reilly
said in an interview after the company's IPO that the higher price
Intel paid reflected the deeper partnership between the companies.
Cloudera wanted to remain independent, and he disputed that Intel
was trying to prevent Cloudera from being acquired.
The lofty price Intel paid underscores the pressure it faces to
preserve the dominance in its core markets of processors for
servers and personal computers. The investment also sheds light on
the difference in motivation between investment firms, which aim
purely for a financial return, and corporate investors, which often
take stakes for strategic reasons.
Back in 2014, Intel wanted to make sure it had a say in the
direction of big-data software, according to the people familiar
with Intel's thinking. Big-data software was helping drive the use
of chips, as companies needed more processing power to mine the
vast troves of information flowing through their networks.
Intel deliberated privately for about six months over whether to
invest in Cloudera or try to buy it, according to one of these
people. Intel decided against trying to acquire the startup for
reasons including that to do so might alienate some of its bigger
partners such as Oracle Corp. and International Business Machines
Corp., which also provide data-management software. On the other
hand, if Cloudera was owned by another company, it might not be as
concerned about making its software work best with Intel chips,
according to this person.
In March 2014, Cloudera said that T. Rowe Price, Google Ventures
(which is now GV, Alphabet Inc.'s venture-capital arm) and MSD
Capital would invest $160 million, paying $14.56 a share at a $1.8
billion valuation.
Intel wanted in, but only if it could take a larger stake and
influence development of Cloudera's software, said a person with
knowledge of the deal. Cloudera requested Intel pay more than
double what those previous investors paid, saying it didn't need
funding after its last round, a person with knowledge of the deal
said.
Later that month, Intel agreed to buy $371 million in stock from
Cloudera and another $371 million in stock from employees and
investors Accel Partners and Greylock Partners. In May, when the
deal closed, Intel paid $30.92 a share, more than double what the
venture investors had paid in the same funding round.
The bet wasn't a big cost for Intel, representing only about 5%
of its roughly $14 billion in cash and short-term investments.
But the investment could mean financial pain for Cloudera
employees whose restricted stock units were priced at about $26.16
in January 2015, after Intel's investment. Stock options were also
issued to employees in March, but at an exercise price of $17.85,
above the $15 IPO pricing. The share price rose about 21% to $18.10
on the first day of trading, putting Cloudera's market value at
roughly $2.3 billion.
Since Intel's investment, big-data software hasn't lived up to
the hype, and analysts say Cloudera's revenue -- up 57% to $266
million last year -- hasn't grown as quickly as expected. But the
market is still nascent and Intel could still see a financial
return on its investment in a few years.
Intel's investment helped secure its influence in the
data-center market, which currently accounts for nearly 30% of the
chip maker's revenue. About 96% of the servers that shipped last
year contained Intel chips, according to market watcher
International Data Corp.
Partnerships like the one with Cloudera might also help Intel as
it faces increasing competition from IBM, Advanced Micro Devices
Inc. and companies like Qualcomm Inc. that make server chips based
on technology from ARM Holdings PLC. They are all either trying to
compete in the data-center market today or are making plans to do
so.
According to the IPO filing, Cloudera is designing its software
to work best on Intel processors and architecture as a result of
the Intel partnership -- which gives companies an incentive to use
servers with Intel chips if they are running Cloudera's software.
Cloudera anticipates making its chips work best on Intel technology
in the future as well.
--Rolfe Winkler contributed to this article.
Write to Rachael King at rachael.king@wsj.com
(END) Dow Jones Newswires
May 02, 2017 02:47 ET (06:47 GMT)
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