Is the Intel-Altera merger a good deal?

Media reports have confirmed that Intel will buy Altera Corporation for $16.7 billion or $54 per share. This is Intel's largest purchase to date, which also happens to follow recent mergers in a consolidating semiconductor industry.

Last week, Avago announced that it would acquire Broadcom for $37 billion. Other mergers also include NXP and Freescale, Cypress Semiconductor and Spansion, Lattice Semiconductor and Silicon Image, Qualcomm and CSR, Infineon and International Rectifier, and many more.

As part of the merger, Altera will become an Intel business unit that will facilitate continuity of existing and new customer sales and support, according to a press release. The latter will also continue to support and develop Altera's ARM-based and power management product lines.

Intel plans to hit a 7 per cent compound annual growth rate with the merger, but some analysts are questioning how the x86 giant could achieve this. In an EE Times report, Rick Merritt noted one market analyst who said privately that the math of the deal's financials "doesn't make sense to me." Another one suggested Intel might have fared better by using the same money to buy back its own stock.

"We view the acquisition of Altera as a good strategic asset for Intel, albeit at a very high price," said Ross Seymore, analyst for Deutsche Bank." By our math, the deal appears ~3 per cent accretive in 2016... The accretion is meaningfully less than if Intel had used the same amount to repurchase its shares (~10 per cent accretion)," he wrote in a report.

"We thought Broadcom was a better acquisition—that would have given them additional capabilities," said Hansel Jones, principal of International Business Strategies, Inc., adding that the $16.7 billion price tag for Altera was "a rich price to pay."

"Now Intel has the challenge of getting the value out of Altera ... [but] Intel won't be able to make significant cuts and increase gross margins because Altera is well managed," he added.

According to IHS Technology, Intel is the largest supplier of microprocessors (MPUs) in the world, with overall semiconductor revenues nearing $50 billion in 2014 and MPUs comprising 80 per cent of that revenue. While not as large as Intel, with $2 billion in 2014 revenues, Altera is the second-largest supplier of programmable logic devices (PLDs) and system-on-chip (SoC) field programmable gate arrays (FPGAs).

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