• Packaging technology considered equal to industry leaders
• Sector executives see benefits in a Qualcomm/Intel combination

As Intel [NASDAQ:INTC] keeps its head down and continues to work on its product business and build up its fabrication business where semiconductors are made, its product business is likely most attractive to potential suitors, said two sector advisors, industry executives and an analyst.

News reports of Intel looking at strategic options come as the company continues to miss its mark. In the second quarter, Intel reported a net loss of USD 1.65bn. It is working on slashing costs such as headcount and refocusing the business. Intel’s shares are down about 53% year to date.

The Santa Clara, California-based company seems to be happy with its structure and is likely going to keep things as is, the two advisors said. It will likely rebuff takeover interest, the first advisor said, following recent reports of being approached by Qualcomm [NASDAQ: QCOM] and Arm Holdings [NASDAQ:ARM].

A third advisor said a merger wouldn’t be Intel’s first choice, as it would rather raise more capital and look for investors who would participate in a funding round.

At Intel’s board, the debate is whether the manufacturer of central processing units (CPUs) and semiconductors should split the business into a product company and fabrication company, keep the company’s structure the same, or partner with other companies, according to the first sector advisor.

Intel’s product business — which includes personal computers; data centers and artificial intelligence; and network and edge – generated USD 11.8bn in revenue for the second quarter, according to the company’s recent earnings report. The foundry earned USD 4.3bn in revenue in the same period. Meanwhile, Intel’s other units, Altera and Mobileye Global [NASDAQ:MBLY], posted under a billion dollars in revenue altogether.

The product business has a great foundation, according to the first advisor. Though it has not executed well, companies like Qualcomm, Arm and Broadcom [NASDAQ:AVGO] could have interest in it, the first advisor noted.

One industry executive said that Intel’s packaging technology — which refers to the technologies used to assemble chips — is second or equal to Taiwan Semiconductor’s [NYSE:TSM], which would make it a valuable asset for any company. Also, the company’s design capability is significant, this executive added.

It’s unlikely the Intel board would sell the product business because it’s the better business, this advisor said. Intel would be left with the fab, which is capital intensive, and revenue for its big customers has not kicked in yet.

“I don’t think you can sell the product business. That’s what came out of this,” he said. “They’re going alone and rebuff.”

The other sector advisor said most companies will outsource the fab, and Intel could pursue a similar strategy by divesting its foundry business, outsourcing production, and using that cash to buy back shares and reinvest in development. There were huge imbalances in the supply chain in 2021 and 2022 and at the time the foundry probably looked like a smart investment, but the supply chain issues have evened out, the advisor said.

“I can imagine the buyers list for the fab is a lot skinnier than the buyers list for the product business,” the second advisor said.

Nevertheless, Intel will likely look to divest some units or businesses on its own terms unless it hits financial distress — in that case all bets are off, the second advisor said.

To be sure, the company is working on improving traction on the product side. For instance, Intel announced that it is working with Amazon on AI chips. At the same time, Intel is still a leader in CPUs. That said, the market opportunity has shifted from CPUs to graphics processing units (GPUs), which will be a challenge to Intel’s business, the advisor noted. The executive said Intel has made significant progress in manufacturing and is expected to get its 18A technology out in a competitive fashion to Taiwan Semi.

Both Qualcomm and Intel could benefit from combination

Despite Intel’s apparent desire to remain independent, executives in the semiconductor industry say that combining Intel and Qualcomm would make strategic sense.

One industry executive said a cleaned-up Intel, together with Qualcomm, would bring together mobile, automotive, industrial, and data center technology and create a strong competitor. This would allow Intel and Qualcomm to leverage their ARM and X86 technologies, loading their fabs as appropriate, and keep more of the margin away from Taiwan Semi, he explained.

Ironically, in some ways, “Qualcomm needs Intel as much as Intel needs them,” this executive added.  Qualcomm’s fight is with the likes of Huawei’s HiSilicon, AMD [NASDAQ:AMD], and Nvidia [NASDAQ:NVDA], and Qualcomm is viewed more like a little “one-trick pony” compared to its peers. Pooling its resources with Intel’s would help improve its position in the market.

Ramin Farjadrad, CEO at Eliyan, which makes chiplet interconnect technology and whose biggest investor is Intel, said Intel has failed to deliver competitive products and processors and Qualcomm could help restructure that part of Intel and help give direction to Intel’s foundry, which is key for the US in building up its chip foothold to better compete globally.

Companies have been turning to Taiwan Semi for chip manufacturing because it is the most reliable, and Samsung comes after, Farjadrad said. That could change if Intel’s foundry is strengthened in the US. With funding from the US CHIPS Act of 2022, Taiwan Semi and Samsung are building fabs out in Arizona, but they will have limited production, Farjadrad noted.

“I believe combining the two technologies and the change of leadership will play a big role in that success,” Farjadrad said. Then on the foundry side, Qualcomm, with its analog products, could help improve the manufacturing of Intel’s devices transistors to support a wider range of applications, which can help Intel bring more companies into the fold, he said.

Meanwhile, Cody Acree, a semiconductor-focused analyst at Benchmark, was less sanguine about a full-scale acquisition, noting that Intel doesn’t benefit Qualcomm much. Qualcomm would inherit factories they would know little about and would likely have to sell.

The foundry business consumes plenty of capital

What’s key for Intel is needing to raise more capital to reinvest in its business, the advisors and executives noted.

Late last month, Apollo Global Management offered to make an investment of up to USD 5bn, as Bloomberg reported.

Apollo’s investments could potentially be collateralized by each of the fabs where Apollo doesn’t just put money into Intel, but effectively and structurally invests into the fab, the first sector advisor said. The tech company could also seek private capital from private equity firms in other fabs, he said.

But one of the industry executives said that Apollo’s USD 5bn investment is like a three- to six-month respite from “the wolves.”

Benchmark’s Acree said Intel’s assets, such as Altera and Mobileye, offer potential capital sources. In fact, Intel announced this week that it will operate Altera as a standalone business before seeking an initial public offering for it. It also has an equity interest in Mobileye, as Bloomberg reported. Altera is the second-largest player in the field programmable gate array (FPGA) market, focusing on industrial, automotive, and communications markets, which provides strong valuation opportunities.

Intel declined to comment.