Intel stock

Why Intel Stock (Nasdaq: INTC) Is Up on Talk of an Altera Deal

When word got out Friday that Intel Corp. (Nasdaq: INTC) was in talks to buy fellow chipmaker Altera Corp. (Nasdaq: ALTR), Intel stock rose 6.4%.

That tells you how much this deal would benefit Intel. Usually the prospect of a large acquisition causes a drop in the stock of the company doing the buying as investors worry about fresh debt and possible complications.

Intel stockThe deal also shows how serious Intel is about re-establishing its global leadership as a chipmaker. The sting of missing out on the mobile revolution continues to haunt the Santa Clara, Calif.-based company.

Buying Altera fits with Intel's strategy of going after new growth markets like wearable tech and Big Data. Altera's chip technology is widely used in data centers.

According to The Wall Street Journal, which broke the story, Intel and Altera are in "advanced talks." The price is unknown, but a 25% to 30% premium on Altera's value before word got out puts the potential deal in the neighborhood of $13 billion.

Altera's market cap surged from $10.4 billion before the news to $13.4 billion as of Friday's close, with ALTR stock up 28%. Today (Monday) Altera stock has pulled back about 4%. INTC stock was giving back ground Monday, down about 1.5% to $31.50.

The deal would be Intel's biggest ever. And the price will just about double Intel's debt. But it's something Intel needs to do.

Intel's Quest for Growth in a Post-PC World

You see, Intel is at a crossroad.

INTC stock is up about 22% over the past year, but has slumped more than 13% in 2015 as the outlook for its PC business continues to dim.

Two weeks ago the company slashed its revenue forecast for the first quarter based on lower PC sales. Intel still dominates that market, but knows it needs to look elsewhere for growth.

Attempts to catch up in mobile have not gone well. To encourage use of its mobile chips, Intel has heavily subsidized the cost to netbook and tablet makers.

Those subsidies have resulted in modest market share gains but huge losses - $3 billion in 2013 and $4.21 billion last year.

Intel's wearable tech strategy - with its tiny "Quark" system-on-a-chip and Edison, a computer that fits on an SD card - shows more promise. But it's still early in the game for wearable tech.

The one area with the most potential to drive Intel stock right now is its data center business.

And that's where an acquisition of Altera could make a major impact...

What Altera Brings Would Boost Intel Stock in the Long Term

Intel's data center group was a bright spot in 2014, with revenue up 18% over 2013 and profits up more than 30%.

The data center group already generates about 26% of Intel's business. An Altera acquisition would give that division a 13.4% increase in revenue and a 7.44% pop in earnings.

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And the tech that Altera brings to this deal would give Intel a decisive edge in the data center market.

It is only one of two companies - the other being Xilinx Inc. (Nasdaq: XLNX) - that make what are called field-programmable gate arrays, or FPGAs.

Customers can configure these specialized chips for a variety of tasks. FPGAs are popular in phone networks, computer networking equipment, and, yes, data centers.

FPGAs can perform certain tasks more efficiently that a system's main processor. In data center equipment, FPGAs become "helper chips" that can boost the overall speed of the whole system.

Intel's data center gear already uses Altera's FPGAs. The two companies have cooperated for several years.

But owning Altera will make it much easier for Intel to build FPGA-enhanced data center products. At the same time, the move takes Altera's chips out of the hands of rivals in a market that research firm Gartner Inc. projects will be worth $143 billion in 2015.

And it gets better. Altera is a "fabless" chipmaker, which means it pays others to build the chips it designs. Intel has several chipmaking plants that need to be kept busy.

Despite the cost, over time an Altera deal would pay for itself many times over. And it would provide a much-needed new catalyst for Intel stock.

"This would be a significant move for Intel, it would be a significant change in strategy," Betsy Van Hees, an analyst at Wedbush Securities Inc., told Bloomberg. "They need diversification beyond the PC market. Data center has been a tremendous source of strength."

The Bottom Line: Intel is close to making a deal for fellow chipmaker Altera. While it's a lot to swallow, the deal would give Intel's fastest-growing business - its data center division - a turbo-boost. And that, in turn, will serve as a fresh catalyst for Intel stock.

Another Smart Intel Move:  For several years, Intel has pursued a strategy to make it more competitive that has nothing to with circuits. It's a more practical side of the business that has to do with where Intel manufactures its chips. This is what keeps Intel's profit margins so plump...

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