Technology Update: ‘Major Shake-up in the Semiconductor Sector?’

By Daniel Morgan, Synovus Trust Senior Portfolio Manager

The Wall Street Journal recently reported that Qualcomm approached the struggling Intel with a takeover proposal that would unite the two rivals into a single chip company. Qualcomm is one of the big winners of the mobile revolution, with its chips found in almost every smartphone on the market. Qualcomm is one of the top makers of the modem chipsets that go into Apple’s iPhones. Qualcomm is expected to continue to supply Apple with 5G modem chips for iPhone launches in 2024, 2025 and 2026. Apple is on the verge of releasing its new iPhone 16 this Fall. Qualcomm is said to generate up to 20% of its revenue from Apple as a customer. Intel, the once the dominate provider of PC and server chips, has been late to the “AI data center chip-party,” and is now grappling with crisis after crisis, struggling to turn around its deteriorating situation. The biggest question is, “Why would Qualcomm want to take on Intel’s burdens?”

1. This combination has the potential to shake up the industry, creating a whole greater than the sum of its parts. Add a conventional one-third takeover premium to Intel’s $90 billion market value, plus net debt of $18 billion, and the total transaction could be valued at $142 billion. It could optimize and enhance the operations of both companies, possibly creating a formable competitor capable with resources great enough to challenge Nvidia's monopoly in the AI chip market. Furthermore, it could reinvigorate U.S. President Joe Biden and his administration's efforts to position the U.S. as a global chip manufacturing hub — assuming the companies can overcome the complex challenges that accompany such a massive merger.


2. The two combined companies would serve almost every major market in the chip space. Qualcomm generates 75% of revenues from smartphones. By expanding into the larger more lucrative PC/datacenter markets this would create the potential for greater revenue. Intel makes personal computer and server chips. Qualcomm has made an inroad into the PC market amid the AIPC wave, establishing an exclusive partnership with Microsoft, integrating its X-series Chips into Microsoft’s Copilot+ PC. Qualcomm aims to capture Intel’s market share in the PC chips amid the AIPC trend. Despite these inroads, Qualcomm might have to abandon their PC-chip efforts to satisfy potential regulatory concerns — as this would unlikely be Intel, as the X86 is core to the company’s identity.


3. With Intel offering its strength as PC/server giant and Qualcomm’s core competency in its proprietary code-division multiple access (CDMA) technology for communications/smartphone chips, the combined companies could complement each other. For instance, Intel previously failed with its mobile ambitions to compete in the lucrative Digital Signal Processors (DSP) market many years ago, while the communication market is Qualcomm’s specialty. DSP’s work hard to manipulate analog signals in real-time, resulting in seamless operations in various electronic devices like smartphones, laptops and stereo systems. Texas Instruments soared by establishing itself as one of the leading providers of DSP chips for cell phones but exited the market in 2016. Despite Qualcomm’s strength in the communication chip market, it is unlikely that it would be able to quickly improve Intel’s positioning in the datacenter/AI compute space since Intel has lost ground over the years to both Advanced Micro Devices (AMD) and Nvidia.


4. Then there’s the matter of Intel’s manufacturing facilities. Unlike Qualcomm (which is fabless), Intel is capable of making its own chips and has the facilities to do so. In addition, Intel is working to build out a foundry business that would build semiconductors for other chip companies. That’s been an expensive process, and the foundry segment is expected to bleed red for several years out. Qualcomm would gain manufacturing capabilities through a possible deal, and its margins could improve as it would not have to outsource its chip manufacturing. But there’s a problem. Qualcomm’s current manufacturing partner TSMC is said to still be ahead of Intel in manufacturing technology.


5. One possible option could be to split the consolidated company into a manufacturing arm, and with a separate company that focuses on core design and marketing. Intel’s foundry segment could be spun off into a separate company. Intel’s fabless segment (design/marketing) could be valued as high as $187 billion after a spin-off. Since AMD’s announcement of the spin-off of its manufacturing arm to the establishment of Global Foundries, AMD’s P/B and P/S ratios have grown notably. Intel’s foundry business could be valued as high as $80 billion.


6. Still, there’s the possibility that the companies wouldn’t mesh from a cultural perspective, as Intel is known for having an especially aggressive ethos. Another major issue would be financing. Qualcomm has only $13 billion in cash on hand. Therefore, it would likely need additional investors and asset divestures to finance the deal.


7. Finally, there are regulatory issues. At this point the regulatory climate is challenging as past mergers in the chip space — Nvidia’s bid to acquire Arm Holdings, Broadcom’s proposed acquisition of Qualcomm and Qualcomm’s attempt to buy NXP Semiconductors – all fell through. A Qualcomm-Intel deal would be a tough mountain to climb to garner regulatory approval!