Three years ago, Intel INTC 3.31%increase; green up pointing trianglewas worth more than double its current value, and Chief Executive Pat Gelsinger was on the prowl for acquisitions.
Now Intel itself is a takeover target, in a sign of how strategic missteps and the artificial-intelligence boom have combined to reshape the fortunes of America’s most storied semiconductor company.
A recent acquisition approach by Qualcomm QCOM -2.87%decrease; red down pointing triangle, reported by The Wall Street Journal on Friday, reflects a vulnerability with few precedents in Intel’s 56-year history. The problems started with manufacturing setbacks before Gelsinger took the helm. And they have worsened as the CEO pursued a costly turnaround strategy that failed to foresee how the explosion of interest in AI would fundamentally redirect demand toward a type of chips made by rival Nvidia.
“Over the past two to three years the shift to AI was really the nail in the coffin for them,” said Angelo Zino, a veteran industry analyst at CFRA Research. “They just didn’t have the right capabilities.”
Even if Intel proves receptive, a deal with Qualcomm is far from certain for regulatory and other reasons. But the idea of the smartphone-chip giant acquiring Intel would have been almost unthinkable not that long ago.
Intel reigned for decades as the world’s most valuable semiconductor company, its chips nearly ubiquitous in personal computers and servers. In an industry where specialization was increasingly the norm, it was a rare company that designed and manufactured its own chips—and it was the world leader in both.
By the time Gelsinger became CEO in early 2021, Intel had lost some of its mojo, having fallen behind rivals in Asia in the race to manufacture the fastest-performing chips with the smallest transistors.
Gelsinger, who had previously worked at Intel for decades and was its first chief technology officer, had a plan to bring back the swagger Intel enjoyed under chiefs such as Andy Grove and Paul Otellini.
Doing so would entail catching up to those Asian rivals, Taiwan Semiconductor Manufacturing Co.and Samsung Electronics. He also planned to spend heavily to build out Intel’s manufacturing operations, and to sell that production capacity to design-only chip companies such as Qualcomm—breaking into the so-called foundry business that TSMC and Samsung dominate.
It was a costly, ambitious bet, but the ingredients seemed to be there for it to work: a strong core business of making chips for personal computers and servers along with a constellation of side businesses that could help fund Intel’s next stage of growth.
Gelsinger quickly sought to use Intel’s financial resources to build up the contract chip-making business, engaging in talks to buy GlobalFoundries for about $30 billion the summer after he took over. That deal fizzled, but in an August 2021 interview, the CEO said Intel remained acquisitive. “There will be consolidation in the industry,” he told the Journal. “That trend will continue, and I expect that we’re going to be a consolidator.”
He eventually settled on an acquisition of Tower Semiconductor, another contract chip maker, for more than $5 billion, although that deal was called off last year after Chinese regulators failed to approve it.
Intel’s contract-manufacturing business had a slow start toward Gelsinger’s goal of becoming the world’s second-largest such company by 2030. It cycled through several leaders and numerous potential customers who curbed or pulled their business after encountering technical missteps.
Rise of Nvidia
As the costs mounted at Intel, generative AI started taking off. The boom shifted demand away from Intel’s central processors toward “graphics processing units” from Nvidia, whose different design is better suited to the creation and deployment of the most sophisticated AI systems. As tech companies begged for Nvidia’s scarce AI chips, many of Intel’s processors sat on the shelves.
Gelsinger was compelled to slash costs to preserve his turnaround effort. Intel laid off thousands of people starting in 2022 and cut its dividend last year. It wasn’t enough. Last month, Gelsinger said it would lay off 15,000 people, cut costs by $10 billion next year and scrap the dividend.
“The AI surge was much more acute than I expected,” Gelsinger said at the time, calling the cuts “the hardest thing I’ve done in my career.”
Intel this past week announced new moves, including more spending controls and further separation of its design and manufacturing operations—though Gelsinger stopped short of selling or spinning off the manufacturing business as some investors have urged.
“We need to fight for every inch and execute better than ever before,” Gelsinger told employees. “Because that’s the only way to quiet our critics and deliver the results we know we’re capable of achieving.”
Prospects for a positive turn in Intel’s fortunes are narrowing but still possible, analysts say. Cutting costs can help it muddle through its struggles, although its declining stock price has made it more vulnerable to takeover bids and investor activism.
Through Thursday’s close, Intel’s stock was down nearly 70% from its level in early 2020, when it reached its highest point since the dot-com bust. Nvidia’s shares are up more than 18-fold in that period.
Intel’s stock ended up 3.3% in Friday trading after the Journal’s report on Qualcomm’s interest.
‘It may be too late’
Stacy Rasgon, an analyst at Bernstein Research, said Intel’s future rests on the success or failure of a next-generation chip-making technology that is expected to go into production next year and that Intel hopes will vault it over its rivals, at least technologically. Returning to technological leadership could help improve profit margins and engender confidence among customers.
Still, Intel has a fundamental problem that isn’t going away: Its core chip business isn’t expected to recover quickly amid continued strong spending on AI chips.
“We can argue whether the strategy is right or wrong, but the problem is that the core business doesn’t support the path,” Rasgon said. At this point, though, “it may be too late for them to stop.”
For Qualcomm, buying Intel could help it vault into new segments of the chip industry. Qualcomm specializes in mobile-phone chips—it is a supplier for Apple’s iPhones, among other devices—and has been building a portfolio of automotive and internet-of-things chips in recent years. Intel would add a large franchise of chips for personal computers and servers.
It isn’t clear, however, if Qualcomm would keep Intel’s manufacturing operations in any deal. Those operations make Intel’s business very different from that of Qualcomm, which outsources its production. Manufacturing is enormously complicated and expensive. Intel poured $25.8 billion into capital expenditures last year, equal to about 48% of its revenue. Qualcomm’s capital spending in its last fiscal year totaled $1.5 billion, just over 4% of its sales.
Write to Asa Fitch at asa.fitch@wsj.com
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Appeared in the September 23, 2024, print edition as 'Intel Falls From Chip Behemoth To Buyout Target'.
