Intel Mobile Strategy Hinges On M&A
A strong start to the year has bought top chip maker Intel Corp some time to find a place in the rapidly changing smartphone and tablet computer markets, but it will have to move quickly.
Intel's (INTC.O) quarterly results have reduced concerns PC sales are being eaten up by Apple Inc's (AAPL.O) iPad, but some recent deals have left many analysts and bankers puzzled over the company's direction.
With the growth of mobile device sales, Intel will have to prove over the next few quarters that it will not miss a hard-won opportunity to compete in these markets, several said.
"Intel has to do something because the way the world is working, especially where the tablets are going, these guys need to have a mobile phone solution that allows them to process like everyone else does," said one banker.
In mobile, Intel has fallen far behind Britain's ARM Holdings Plc (ARM.L), whose chips are much more power efficient -- a key advantage in devices that run on batteries.
Intel's mobile processors are based on the company's decades-old "x86" PC chip architecture, but says its advanced manufacturing technology -- letting it squeeze more circuits onto a chip -- will help it prevail in the mobile market.
But some analysts warn that Intel might have fallen too far behind to catch up and one recently advocated acquiring a player that uses ARM technology.
Nomura analyst Romit Shah wrote an open letter to CEO Paul Otellini ahead of Intel's earning this week suggesting several strategies, including acquiring Texas Instruments Inc's (TXN.N) line of OMAP mobile processors, which would give the tech giant an established presence among smartphone and tablet manufacturers.
Shah, who says he is usually not enthusiastic about large acquisitions, estimated the business could cost as much as $3 billion based on 2.5 times sales.
ARM Holdings itself has been the subject of many rumors it could be bought by a big tech company, although such a move would make little business sense for the semiconductor company. Part of ARM's appeal is that it does not compete with its customers and instead licenses software to chipmakers across the industry. Selling ARM to any one customer such as Samsung Electronics Co Ltd (005930.KS), Qualcomm Inc (QCOM.O) and Texas Instruments Inc (TXN.N), would tip that delicate balance, bankers said.
Intel recently spent $7.6 billion to buy cyber security company McAfee, hoping to build its security technology directly onto silicon chips as it prepares for a market where everything from cars to home appliances are connected by the Internet. Intel also recently completed the $1.4 billion purchase of Infineon's wireless business.
CFO Stacy Smith told Reuters this week there will be no new deals while Intel digests those transactions.
"What we did with buying Infineon's mobile business is it brings us modem technology, it brings us integration technology, it brings us an A-list of customers, so it's doing exactly what we need to do," Smith said.
But some analysts and bankers scratch their heads over McAfee.
"Everything they have talked about being able to integrate the capability into the chip etc, it is all nice marketing language, but net-net people are struggling to see how you implement that," one banker said.
JPMorgan analyst Christopher Danely upgraded Intel to overweight following the company's earnings, although he still struggles to reconcile Intel's recent acquisition spree.
"Intel might as well have bought Whole Foods," he said of the McAfee deal.
Danely added that Intel's deals are not expected to resolve its problems in the tablet market, where they are third behind Nvidia and Qualcomm.
CEO Otellini said Intel would not be blinded by its recent good fortune and will be "investing in developing new products for phones and tablets."
But time is running out and Intel needs to deliver competitive mobile processors soon, the analysts and bankers said.
This month, Intel introduced its newest processor aimed at tablets supporting Microsoft Corp's (MSFT.O) Windows 7, Android and its own MeeGo operating system. It has said it will appear in over 35 upcoming tablets and hybrid computers, but it is unclear how successful it will be.
Microsoft's plans to make future versions of Windows 7 compatible with ARM is another reason why Intel needs to move faster to get into Microsoft devices, Shah said.
"Once they pick their suppliers, it is going to be even more difficult for Intel to break through," Shah added.