CNBC “Squawk Box” Interview: Tech Sector – Intel $16bn bid for Altera @ $54/share – A Move Driven By Limits To Moore’s Law

INTC – Standstill Agreement With ALTR Ends 6/1/15, Transaction Expected: Rumor of an INTC bid for ALTR surfaced in late March 2015, but ALTR then balked at the unsolicited $54/share acquisition price. With the standstill agreement between INTC & ALTR expiring Mon 6/1/15, there is renewed expectation a transaction is imminent. As ALTR posted disappointing 1Q15 results and met with activist investor pressure to pursue an INTC offer, the 11% premium to the recent close is not unreasonable.

INTC – Moore’s Law Meets Dennard Scaling Limitations, Raises Attraction of FPGA To Overcome “Dark Silicon” Limitations: While there are number of broader factors favoring semiconductor sector consolidation (e.g. rising data center significance as Big Data analytic applications more widely adopted by enterprise customers, sector revenue growth catching up to global GDP growth after a 15-year period of lagging behind, low interest rates, available funding), INTC may be pursuing ALTR because of power consumption limitations to Moore’s Law as progressively smaller circuits cannot be fully employed without exceeding power budgets thus giving rise to “Dark Silicon” limitation. “Dark Silicon” refers to the amount of silicon that cannot be powered on given a thermal design power constraint. Studies suggested that as much of 50%-80% of silicon may go dark at 8nm process technology nodes, thus effectively putting an end to multicore scaling, an area where INTC has been very active as chip geometries contract. Specifically, ALTR’s position in field-programmable gate array (FPGA) integrated circuits may offer INTC a means to improve chip performance (e.g. 5x) for slightly higher cost (e.g. 10%). For example ALTR Stratix V is being used by MSFT to power Bing search engine activity. MSFT is expected to deploy ALTR’s FPGA accelerated server solution in 2H15. By acquiring ALTR, INTC could address significant limitations to its own technology and enhance its efforts in high-end performance computing.

INTC – Sector Consolidation May Indicate Valuation Top, But ALTR Acquisition Appears To Address Fundamental Challenge For INTC: While the semiconductor sector is experiencing a wave of consolidation activity (e.g. AVGO $37bn offer for BRCM), something that might be signs of a top in terms of sector valuation as insiders cash out, we view INTC’s offer for ALTR as being a necessary step aimed at strengthening the company’s technology portfolio as it comes up against fundamental limitations discussed supra. That INTC may not offer more than the original $54/share offer limits speculation that INTC is chasing ALTR. Wait for transaction to be announced before considering further aspects of the deal.