Intel could go all in on Altera acquisition

The first quarter of 2015 was the most robust three months for M&A activity since the start of 2007, with $843 billion worth of deals completed across all industries, according to data from Thomson Reuters. The semiconductor industry accounted for $21 billion of that total. Now Intel, possibly the most recognizable semiconductor company in the world, is rumored to be close to its biggest acquisition ever.

Intel’s target is Altera Corporation, the San Jose, Calif.-based manufacturer of programmable logic devices (PLDs) with a market cap that soared $3 billion to $13.4 billion last Friday, when The Wall Street Journal first broke news of the deal.

Altera specializes in the production of Field-Programmable Gate Arrays (FPGAs), specialized chips that as a whole are growing faster than the broader semiconductor industry, according to analysts. FPGAs are used primarily in networking equipment, cars, and servers. It is the last product category where Intel sees a big opportunity as it looks to grow its highly profitable Data Center Group, which is approaching $4 billion in quarterly revenue. Intel has had a long relationship with Altera, and has been using its advanced production capabilities to manufacture FPGAs for Altera since 2013. Bringing Altera in-house through an acquisition would obviously allow Intel to leverage the technology even more.

Intel has historically refrained from making big acquisitions, priding itself on its ability to develop cutting edge technology internally. When it has, it has almost always been to diversify away from its PC business, which still accounts for 60% of overall revenues. The Santa Clara, Calif.-based company’s biggest deal to date is the $7.6 billion spent in 2010 to acquire the internet security company McAfee. It has also in recent years reached deals worth around $1 billion for Wind River and Infineon’s Wireless Solutions business.

Financing the acquisition of Altera has its own set of considerations. First, it would require a considerable percentage of Intel’s current cash balance, if it chooses to finance the deal that way. The company currently has $14.1 billion on hand, and an overall market capitalization of around $147 billion, but Altera will certainly fetch upwards of $10 billion. If the deal does go through, it will be a big bet on a company with only $2 billion in annual revenue and a current P/E ratio approaching 30. To put that in perspective, Xilinx, the leading FPGA manufacturer (Altera is second) is currently trading at a P/E multiple of 17.76. The financial data is according to Yahoo Finance as of 1 PM ET Thursday.

Intel recently lowered its outlook for its Q1 earnings (to be announced April 14th) by $900 million, citing an expected underwhelming performance by its PC business, as SMBs are upgrading Windows XP computers at a slower clip than anticipated. That being said, the Data Center Group appears poised to continue on its 25% YoY growth rate, and Intel’s stock price shot up when news of the Altera deal first broke. A week later, though, and nothing official has been announced. As with all deals of this magnitude, there is a lot to consider.