Merger mystery II – How happy should its investors be that Intel is back on the M&A trail?
Intel has been back in the merger and acquisition (M&A) headlines. The world’s largest manufacturer of computer chips – which featured prominently among the highly-acquisitive businesses catalogued in the Empirical Research Partners work we discussed in Merger mystery – has agreed to buy programmable processor manufacturer Altera for $16.7bn (£10.8bn).
Much has been made of this being the largest acquisition in Intel’s history (although, in passing, it may be worth noting it is only the third biggest deal to have been done in the semiconductor sector over the last three months). Still, given what might be kindly described as the group’s mixed track record in M&A, investors could be forgiven for wondering how value-enhancing the Altera purchase will prove.
You need, for example, only Google ‘Intel’ in combination with ‘McAfee’ for a particularly colourful illustration of how the former’s acquisitions do not always run smoothly. What is more, it is not as if Intel has bought a non-US company this time, which would at least be funded with some of the cash it keeps outside the US and away from the US taxman.
Now, some of the metrics that are used to justify valuations within the information technology sector are nothing if not imaginative. However, if we were being generous – and were aiming to avoid a slippery slope that begins with some metric on a par with ‘$ per eyeball’ and ends we dread to think where – one might use an enterprise value or ‘EV’ model that takes into consideration the purchased company’s sales.
Looked at in that light, Intel has paid in the region of 9x sales, which is not too far from what Hewlett-Packard paid for Autonomy back in 2011. Intel will be hoping the Altera story has a far happier ending and yet, here on The Value Perspective, we suspect that if it continues to make similar acquisitions, it is unlikely to create value for shareholders over time and, as we pointed out in Merger mystery, that will not help its share price.
Fund Manager, Equity Value
I joined Schroders as a graduate in 2005 and have spent most of my time in the business as part of the UK equities team. Between 2006 and 2010 I was a research analyst responsible for producing investment research on companies in the UK construction, business services and telecoms sectors. In mid 2010 I joined Kevin Murphy and Nick Kirrage on the UK value team.
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