Intel Should Embrace Rival's Chip Design

Intel Corp. should embrace the technology of rival ARM Holdings PLC to strengthen its position in the mobile-computing market, an analyst wrote in an open letter to Chief Executive Paul Otellini on Monday.

Romit Shah, analyst with Nomura Equity Research, also suggested that Intel (INTC), the world's biggest chip company, consider buying Texas Instruments Inc.'s (TXN) mobile-chip business to bolster its push into the smartphone and tablet markets.

Shah said that despite Intel's gains in its core PC and server markets, the company has struggled in the mobile-computing arena where ARM's (ARMH) more power-efficient chip design has remained dominant.

Shah also noted how Intel's stock has lagged the S&P 500 Index. Intel shares have slipped roughly 18% over the past 12 months, while the S&P 500 has risen about 9%.

"We believe Intel should embrace the ARM architecture," Shah wrote. "Intel's core strengths are building advanced manufacturing processes and optimizing processor architectures. That said, we believe the x86 architecture is not competitive versus ARM in low power applications such as mobile handsets and tablets."

Intel is widely expected to use its scale and strengths in manufacturing technology to catch up with ARM. Shah pointed this out in his letter saying, "Intel should bridge the power gap by further integration and die-shrinks using advanced processes."

But Shah also added, "We believe ARM is likely to stay ahead on performance per watt."

Intel, Shah argued, "will have to bring down power while improving performance efficiency, which may be a multiyear challenge, in our opinion."

"With an ARM license, we believe Intel could leverage its 22-nanometer process technology, design expertise, and scale to create a stronger competitive offering and dominate the mobile computing market," Shah wrote.

Shah also said it would make sense for Intel to buy TI's wireless application chip, known as OMAP, which is also based on ARM's technology.

The TI chip is used for such devices as e-readers, smartphones and tablets.

"They could accelerate their position in mobile computing by buying a wireless business, and the TI wireless business seems like the best candidate," Shah said in an interview.

In the letter, Shah said, "Nvidia (NVDA) would also bolster Intel's graphics capabilities but is expensive with an enterprise value of $7.5 billion. In addition, Intel is likely to face steep regulatory hurdles given Nvidia's dominance in the graphics market."

Intel could not immediately be reached for comment.

"I'm sure they're rolling their eyes at me right now," Shah said.

Analyst Cody Acree of Williams Financial Group said Shah's proposals are "definitely interesting," but he added, "I'm not sure we would expect a lot to come of it."

Acree said Shah's points that have been raised by other analysts who agree that Intel's "multiple efforts in wireless have been unsuccessful, whether in tablets or smartphones."

Acree also agreed that it makes sense of all potential acquisition targets TI's wireless business would be "very much the cleanest."

"That division could be stripped out fairly cleanly," Acree said in an interview. "It would not be a drastic change in their current business model if wireless was not there tomorrow."

With heightened competition in the wireless market, TI has focused more on its strengths in the analog chip market.

TI is scheduled to report results after Monday's closing bell. Intel is scheduled to report after the market's close on Tuesday.

-Benjamin Pimentel; 415-439-6400; AskNewswires@dowjones.com

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