Intel Corp.'s chief executive largely took incremental steps in
his first two years atop the chip giant to reduce its long-standing
reliance on the personal-computer market. Now, Brian Krzanich is
stepping out on a limb.
The $16.7 billion deal that Mr. Krzanich disclosed on Monday to
buy programmable chip maker Altera Corp. is the costliest in the
Santa Clara, Calif., company's 47-year history. Some Wall Street
analysts question whether Intel paid too much.
Even Mr. Krzanich characterized the price as startling. "There
is a bit of surrealness to it," he said in an interview on Monday.
"The number is so big."
But Mr. Krzanich, a 55-year-old manufacturing veteran who became
Intel's sixth CEO in 2013, believes Altera's technology will pay
off by expanding Intel's most lucrative business—chips for
corporate-data centers—and by allowing it to better exploit a
nascent market known as the Internet of Things.
Its offer would deliver $54 a share to Altera holders, about 56%
higher than when The Wall Street Journal first reported deal talks
between the companies in March. It continues a wave of
consolidation in the chip industry, which includes Thursday's $37
billion bid for Broadcom Corp. by Avago Technologies Ltd.
Intel has a big reason to follow suit. Demand for its
microprocessors used in PCs, the technical foundation of Intel's
business since the early 1980s, has slowed as spending shifted to
products like smartphones and tablets. After a slight rebound in PC
spending last year, Intel said in April that revenue from the group
that includes PC chips fell 8%.
Intel has carved out a foothold in smartphone chips after years
of effort, working to crack a market where chip designs licensed by
ARM Holdings PLC are the norm. And under Mr. Krzanich it has
managed to build a large position in tablets, with the aid of
costly subsidies, but a comparable share in smartphone chips seems
unlikely soon.
Smartphones are "not one of the areas that is likely to be a
growth engine for the company," Mr. Krzanich said.
Mr. Krzanich is a self-described tinkerer who sometimes appears
at hobbyist events where nonprofessionals show off electronic
devices they build. He has promoted the use of Intel chips for such
gadgets, while pushing the company into markets for smartwatches
and other wearable technology.
Altera, along with San Jose, Calif.-based Xilinx Inc.,
specializes in chips called field programmable gate arrays that can
be customized for specific jobs after they leave the factory. They
are particularly popular in networking and wireless equipment,
which would represent new markets for Intel. Some companies have
also been using FPGAs alongside conventional chips to help speed up
servers, a concept that is among Intel's motivations for the
deal.
Another motivation has to do with the steep costs required to
stay on the relentless, two-year cadence of semiconductor
miniaturization dubbed Moore's Law, after an Intel co-founder.
Intel already makes some chips that Altera designs under a prior
partnership. Mr. Krzanich said Altera could benefit from more of
Intel's manufacturing prowess in the future, getting access sooner
than other FPGA makers to new production recipes that could help
squeeze more features on chips.
Altera already is quite profitable. Its gross margin, or profit
after production cost, stood at 64% of sales in the first quarter,
where Intel reported a smaller, 60.5% margin for the period.
But growth is a question. Altera reported that its sales
declined 6% in the first period. And with 2014 revenues of just
$1.9 billion—compared with $55.9 billion for Intel—some analysts
question whether the Altera acquisition can provide the sizable
revenue bump Intel seeks.
"Growth targets appear wildly optimistic," wrote Stacy Rasgon,
an analyst at Sanford C. Bernstein, in a research note after Intel
announced it was buying Altera for about $16.7 billion. "It appears
challenging to justify the price paid for the asset."
But Intel executives said they expect the FPGA market to expand
about 7% a year, and expect Altera to add to Intel's per-share
earnings in the first year after the deal closes.
Intel initially plans to begin selling Intel Xeon chips in units
that also contain Altera FPGAs, a combination that can have
advantages over buying the two kinds of chips separately. Those
products should arrive in late 2016 and be widely available the
next year.
But the biggest advantages, Mr. Krzanich said, come when the two
kinds of design are placed on one piece of silicon. Faster
communications among the circuitry on such integrated products
roughly doubled the performance compared with separate chips, he
said.
Server vendors are expected to be the first target for such
combinations. But Mr. Krzanich also planned to combine Intel's
low-cost Atom processor chips with Altera circuitry for
applications that fall under the Internet of Things, a broad term
for adding processing and communications capability to many kinds
of everyday items purchased by consumers and businesses.
Mr. Krzanich said Intel wouldn't target the kind of low-price
chips that go into products like so-called smart light bulbs and
doorknobs. Rather, he expected to target applications where beefier
Intel chips could be combined with specialized instructions
programmed into Altera's circuitry.
One example might be chips for robots that need vision
capabilities to move around their environment, Mr. Krzanich said.
If specialized vision algorithms were incorporated into FPGAs, he
said, "the robot could be twice as fast, twice as capable and lower
cost."
Other examples could be drones that fly independently for
purposes such as delivering packages, or advanced automotive
driver-assistance systems, Mr. Krzanich said.
One reason customers are excited about FPGA technology, he
added, is that instructions programmed into such chips can be
updated as technology or market conditions demand—an advantage over
chips designed to do one kind of job.
Altera will become a new operating division of Intel, Mr.
Krzanich said, with substantial cost savings expected as duplicate
general and administrative functions and workers are eliminated. A
future role for John Daane, Altera's chief executive, hasn't been
disclosed.
The deal, which is subject to regulatory approval, is expected
to close within six to nine months, Intel said.
Intel's shares fell 1.6% to $33.90 while Altera's shares rose
5.8% to $51.68, both in 4 p.m. Nasdaq trading on Monday.
Write to Don Clark at don.clark@wsj.com
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