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Intel is very much for sale. The good news is that buyer interest demonstrates that there is at least a modicum of confidence in a turnaround. The bad news is that by selling at a low point, the buyer or buyers will reap much of the upside rather than current shareholders.
There are multiple types of “sale” transactions. News reports in recent days suggest that Qualcomm is knocking on the door of Intel. A full acquisition is complicated and seems unlikely for regulatory and strategic reasons. Such a buyout would almost certainly be about eviscerating Intel’s cost base.
A more likely outcome is that Intel relies on more multibillion-dollar, expensive private capital investments, similar to the project finance arrangements it already has with Brookfield and Apollo.
These partial transactions will not come cheap for existing common shareholders. But Intel has made the choice that it wants to remain both a cutting-edge designer and manufacturer of chips. Such a turnaround is uncertain in a rapidly changing world with capable competitors. The near-term results, which have to be published quarterly, perhaps overstate the depths of Intel’s decline and the possibility of a revival. And that short-sightedness creates the opening for more long-dated thinkers.
In the most recently completed quarter — where Intel said it would lay off 15,000 workers and cut annual operating expenses from $25bn to less than $18bn — the company generated just $2.3bn in cash flow from operations. About $10bn of annualised operating cash flow will not support the tens of billions in capital expenditures Intel needs, even as the company says that capital intensity is diminishing as new fabrication plants and production technology comes online.
For its ambition and perhaps hubris, Intel has cancelled its dividend, which once paid out $6bn to shareholders in a year. In exchange, investors get an uncertain pay-off that is going to benefit most those who put in capital in the current cyclical low.
There is another world where the company simply decided to go into run-off mode. It could slash most of its operating cost base, concede AI and other innovation to others and simply harvest and return the cash it would get from selling tens of billions in dollars of outdated but necessary semiconductors — though a little bit less every year.
It is too late for that now. The company has been deemed a national security asset in the meantime. The choice to keep going big very much amounts to a value transfer from existing shareholders to the new ones.