Intel's stock seals strong week. But would a Qualcomm merger make sense?

By Emily Bary

One fund manager sees 'more cons than pros' if the companies were to combine, after the Wall Street Journal reported that Qualcomm approached Intel about a possible deal

It's been a dramatic few days for Intel Corp., and that drama certainly isn't receding as the week winds down.

The latest development? A Wall Street Journal report saying that Qualcomm Inc. (QCOM) has approached the company about a potential takeover recently. The report, which cites people familiar with the matter, helped send Intel shares (INTC) up 3% to close out Friday's session. Qualcomm's stock ended about 3% lower, though it had been trading in the red all day.

Intel declined to comment on the report. Qualcomm didn't respond to a request for comment.

The Wall Street Journal story noted that any deal is still uncertain.

It's perhaps unsurprising that Qualcomm would consider scooping Intel up on the cheap, given the 57% year-to-date decline in Intel shares. Intel has various cash concerns right now as it deals with technological struggles and a costly foundry buildout - factors that have prompted the company to announce the suspension of its dividend, as well as widespread job cuts.

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But would a potential deal make sense beyond Intel's depressed price? "There are more cons than pros in a hypothetical case of combining Intel and Qualcomm," wrote Hendi Susanto, a Gabelli Funds portfolio manager, in emailed comments.

He noted that in a combination, "Qualcomm will inherit all Intel's challenges," and that "there is nothing unique about Qualcomm that can significantly help address those."

Intel makes personal-computer and server chips, while Qualcomm makes mobile products and recently entered the PC market as well. While there's some overlap in product, one company might have to abandon their PC efforts to satisfy potential regulatory concerns - and that's unlikely to be Intel, as the X86 is core to the company's identity.

Their diversification of offerings isn't necessarily a bad thing, as the two businesses could leverage each other's strengths. For instance, Intel previously failed with its mobile ambitions, while that is Qualcomm's speciality.

Still, there's the possibility that the companies wouldn't mesh, as Intel is known for having an especially aggressive culture. The company is also now seen as behind the curve, as technological miscues have spurred market-share challenges.

Then there's the matter of Intel's manufacturing facilities. Unlike Qualcomm, 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 see it make semiconductors for other companies. That's been an expensive process, and the company expects its manufacturing business will continue to post losses for several years out.

Qualcomm would gain manufacturing capabilities through a possible deal, and its margins could improve if it didn't necessarily have to pay for outsourcing. Meanwhile, Intel would get to hold on to what's been a core strategic priority of Chief Executive Pat Gelsinger, despite some doubts on Wall Street, and it would get new business for that unit.

Susanto noted the potential for Qualcomm to use Intel manufacturing for certain products as a positive when considering a deal. But there's a caveat: "Note that TSMC is still ahead of Intel in manufacturing technology," he wrote, referring to Taiwan Semiconductor Manufacturing Co. Ltd. (TSM) (TW:2330)

It's unclear whether Gelsinger would want to sell rather than prove out Intel's vision independently, though it's ultimately up to Intel's board. It's also not evident whether the CEO would stick around in the event the company is acquired.

In any case, even with Intel's depressed stock price, Qualcomm would need to pay handsomely to secure a deal. That would mark a dreary conclusion for an independent Intel that was once the lion of the chip world.

Intel announced earlier this week that it would turn its foundry business into a subsidiary, helping to assuage concerns from potential customers about giving chip designs over to an industry rival. The move also allows the foundry business to secure funding on its own, which is noteworthy as this part of the business has a weaker financial profile than Intel's design arm and could have more need for outside financing.

The company also said it had a new "multiyear, multibillion-dollar framework covering product and wafers" with Amazon.com Inc.'s (AMZN) Amazon Web Services.

Intel shares ended the week up 11.1% to log their best weekly performance in 10 months.

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-Emily Bary

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09-21-24 0508ET

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