Intel Nears Agreement to Buy Altera for About $54 a Share -- Update
Source: Dow Jones News
By Dana Cimilluca, Dana Mattioli and Don Clark
Intel Corp.'s on-again-off-again attempt to buy Altera Corp. is on the cusp of succeeding, as the chip maker prepares to announce the roughly $17 billion acquisition Monday, a move that would allow it to boost revenue and help defend a key business.
Altera stockholders will receive about $54 a share, people familiar with the matter said, around the price the company rejected in April in an earlier round of negotiations.
There is, as always, a chance the deal could fall apart at the last minute.
The expected price is 56% higher than the one at which Altera traded before The Wall Street Journal first reported talks between the companies on March 27. Altera's shares closed Friday at $48.85.
Intel's bid continues a consolidation wave in the semiconductor industry, as companies search for new sources of revenue growth and target chip makers finding it hard to boost profitability on their own. Avago Technologies Ltd. on Thursday announced a $37 billion deal to buy Broadcom Corp., the largest technology acquisition on record.
The companies in the latest transaction are already partners. Intel's factories churn out some high-end semiconductors for Altera, which designs chips but turns to external manufacturers to make them.
Intel, the kingpin of processor chips, is expected to use the smaller company's line of programmable chips to get revenue growth at a time when a slowdown in personal-computer demand is crimping its own growth.
Altera's business is also widely seen as a way for Intel to protect its stronghold in chips for server systems, a market that generated more than half of Intel's operating profit in the quarter ended in March. Companies have lately been using chips from Altera and rival Xilinx Inc. to help speed up their servers, and some analysts believe Intel needs to have an internal source of the technology to respond to the trend.
Talks between the companies broke off in April, when Altera rejected an offer from Intel around $54 a share, people familiar with the matter have said. Altera's decision angered some of its major investors, who were skeptical that the company could reach such a price any time soon based on its own efforts. Talks then resumed in May, people familiar with the situation said.
Intel, based in Santa Clara, Calif., is known for general-purpose microprocessor chips that can be programmed to perform a near-infinite variety of computing tasks. But some kinds of operations--like converting a video from one format into another, or encrypting data so unauthorized people can't read it--can be executed more quickly using circuitry that is custom-tailored for the specific task.
Some big electronics companies still design custom chips for their products. But the cost of doing so has risen steadily over the years, so the practice only makes sense for hardware makers that have large sales volumes that will generate a return for their design investment.
Altera, along with Xilinx, popularized a middle path. They sell chips called field-programmable gate arrays, or FPGAs, that are configured by customers after they leave the factory. Each chip contains blocks of circuitry for specific kinds of processing or data-storage jobs, and programmers can select and arrange how electrical signals travel between them.
The result isn't as fast as a specialized chip designed from scratch but has long been an attractive option in certain markets---particularly in hardware such as cellular base stations and switching systems. And a newer trend--using FPGAs alongside server systems in large data centers--is making the technology particular important for Intel's future.
Intel sells more than 90% of the chips used in servers, the mainstay for jobs like delivering email and Web pages. While the company gets most of its revenue from chips for personal computers, its Xeon server chips are much more profitable. So Intel has an incentive to go to great lengths to keep server buyers happy.
Some of those companies, particularly Wall Street investment banks and big Web services, have been experimenting with non-Intel technologies to carry out computing chores faster or with lower power consumption. International Business Machines Corp. is working with a series of partners to try to position its Power chips for Web applications. Users of technology from ARM Holdings PLC, the standard in smartphones, are also trying to penetrate the data center.
Still another tack is to use FPGAs along with Intel's chips or other processors to speed up computing jobs. Microsoft Corp., for example, has been testing the use of Altera FPGAs to get answers faster with its Bing search engine.
Intel has responded to the technology changes in several ways, including customizing chips for some big customers and packaging its Xeon chips with FPGAs. But there is another approach that could pose an even bigger threat in the future, analysts say--putting a processor and an FPGA on one piece of silicon, which allows much faster communications than putting two chips next to each other.
Altera and Xilinx have recently been offering customers FPGAs that have ARM processors embedded in them. Intel, to help get comparable speed benefits and counter rivals like ARM, needs to be able to sell chips that have a similar combination of processor and FPGA technology, some analysts say.
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