Intel’s shares surged by 3% on Friday following a report by The Wall Street Journal’s Lauren Thomas, Laura Cooper, and Asa Fitch, which revealed that Qualcomm has approached Intel about a possible acquisition valued at around $90 billion. This information comes from multiple unnamed sources.
As noted by the authors, the potential deal would be financially challenging for Qualcomm. The company currently holds only $13 billion in cash and equivalents while having the same amount in long-term debt. Even if the acquisition were mostly stock-based, it would still require a substantial debt increase. Moreover, Intel already carries $19 billion in net long-term debt.
This deal would dwarf Qualcomm’s previous attempt to acquire NXP Semiconductor in 2016 for $38 billion. Back then, Qualcomm had a significant amount of overseas cash, which was repatriated following the 2017 Tax Cuts and Jobs Act. After the NXP deal fell through, Qualcomm spent $22 billion of this repatriated cash on share buybacks.
From a financial perspective, combining Qualcomm and Intel might not look appealing. Qualcomm boasts a 76% gross profit margin, while Intel’s is just 35%. Additionally, Qualcomm’s pre-tax operating margin is close to 30%, whereas Intel’s is effectively break-even on an adjusted basis and negative by 15% when considering all costs. This would immediately dilute Qualcomm’s profitability.
However, assuming Qualcomm can make the numbers work, what would be the strategic benefits?
Qualcomm’s main need is diversification, as it is still perceived by investors as predominantly a mobile chip maker. Approximately 70% of Qualcomm’s chip revenue still comes from mobile, despite efforts to expand into the Internet of Things and automotive markets over recent years.
Acquiring Intel would instantly position Qualcomm as the leader in PC and server processors, dramatically reshaping the company’s profile.
Intel, on the other hand, needs to regain its manufacturing edge. The company recently highlighted momentum in its upcoming “18A” chip technology, expected to launch next year. However, it remains unclear if this will be enough to restore Intel’s former dominance. It’s possible that Intel may need external support.
That said, Qualcomm, which operates without its own manufacturing plants, offers little in terms of direct assistance for Intel’s production challenges. While Qualcomm’s higher-margin products could offer Intel a financial boost, simply injecting cash may not solve Intel’s complex manufacturing issues. More oversight in an already intricate process might hinder, rather than help, Intel’s recovery.
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