By Ted Greenwald 

Intel Corp.'s $15.3 billion planned purchase of Mobileye NV propels the chip maker into a stronger position in the booming market for autonomous-vehicle technology, but it also comes with potential hazards -- including the Silicon Valley stalwart's limited experience successfully integrating big acquisitions.

The combined company will face stiff competition in its quest to supply sensors, communications, processing and software systems for the coming era of fully self-driving cars, a market that Intel Chief Executive Brian Krzanich reckons is worth at least $70 billion. Intel will need to build aggressively on Mobileye's strong early position in the burgeoning supply chain for such technology to make good on its lofty valuation for the Israeli company.

Intel has done relatively few big deals in its 48-year history -- and has a mixed record trying to sync those businesses with its core operations and make them grow.

Mobileye is its second largest deal after the 2015 purchase of Altera for $16.7 billion. Altera's product, a programmable chip that can be altered on the fly, complements Intel's business in server chips by potentially speeding up emerging computing tasks. That can give data-center operators a jump on performance and power efficiency as their software evolves. Analysts say it is too early to know whether the integration of Altera into Intel is successful.

Intel's next biggest deal was widely viewed as a disappointment: the $7.68 billion acquisition of cybersecurity-software company McAfee in 2010. Intel, which paid a 60% premium for McAfee, this past September said it would sell 51% of the company to private-equity firm TPG in a transaction that valued the entire business at $4.2 billion and spin it out as an independent company.

Like the Mobileye deal, the McAfee purchase was a long-term bet, focused significantly on Intel's expectation that the burgeoning Internet of Things would create a demand for securing billions of newly connected devices. Intel hoped combining with McAfee would help it sell specialized chips and other products to keep smartphones, tablets and other connected devices secure, but it has struggled to gain traction in that market.

Mobileye, founded in 1999, is still relatively small. It reported net profit last year of $108 million on revenue of $358 million. Both those numbers showed big growth -- sales were up nearly 50% and earnings up 58%. But they still mean Intel, which was trading around 17 times last year's earnings before the deal, is paying around 140 times earnings and more than 42 times total sales for the past year for Mobileye. Those are far larger multiples than Intel paid for Altera or McAfee.

Bernstein Research analyst Stacy Rasgon says the valuation is lofty even compared with analysts' projections for Mobileye's results several years from now. "It's going to be 10 to 15 years before we know if this is actually going to pay dividends for [Intel] or not," he said.

Mr. Krzanich, CEO since 2013, on Monday said mergers and acquisitions have gone better during his tenure. "It's about picking the right leaders, putting my personal attention on it, and having clear measurables within the first six to 12 months," he told CNBC. He added he expects many autonomous cars to be on the road by 2023 or 2024.

The Mobileye deal makes sense because it gives Intel a way to serve car manufacturers "from the data center to the headlight" at various price points, Mr. Krzanich told The Wall Street Journal. It will start adding to its adjusted earnings immediately, Intel said.

Still, the Mobileye deal is largely a bid on the future of fully autonomous cars that may be a decade or more away, Mr. Rasgon said. And Intel faces a range of entrenched, deep-pocketed companies committed to being big players in the market. That group includes auto makers and other tech giants like Google parent Alphabet Inc., Tesla Inc., and Uber Technologies Inc.

Among rival chip makers, Nvidia Corp., whose chips often are preferred for artificial intelligence, attracted attention last summer when its technology replaced Mobileye's in cars made by Tesla Inc. Qualcomm Inc., the market leader in smartphone chips, in October announced a deal to pay $39 billion to buy Netherlands-based NXP Semiconductors NV, the No. 1 supplier of automotive chips. That deal will give Qualcomm's self-driving system an entree to major auto makers.

Mr. Krzanich, in the interview with the Journal, said the Mobileye deal builds on Intel's already strong position in the market. "There's a little bit over 200 autonomous cars [being tested] on the road today," he said. "More than half have Intel technology in them already."

 

(END) Dow Jones Newswires

March 15, 2017 12:36 ET (16:36 GMT)

Copyright (c) 2017 Dow Jones & Company, Inc.
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