Back in May we wrote a piece about the crazy idea that Broadcom could buy Intel. To be brutally honest, we were mostly kidding. That piece could politely be labeled a thought experiment, our real intent was to point out the fact that Intel Foundry’s customers will know before the public markets do about the capabilities of Intel’s manufacturing processes, and since that will largely determine Intel’s fate, there was possibly a good trade to be made.
A lot has happened since then, and we still do not think Broadcom would actually buy Intel, but with so much going on a look at the math might be useful now.
So we dusted off the big guns and brought out our full-blown M&A accretion/dilution model. We have used this model for years to gauge the affordability of any proposed deal. With our model we can analyze different structures of payment – all cash, all stock or 50/50. The model is designed to show the EPS impact on the acquiror, and from that we can make a guess on share price impact. Although, as we will see, the numbers are only going to be part of the story.
Put simply, this will be a tough deal for Broadcom to afford. Intel is barely making money this year and prospects for next year do not look great. On top of that, Broadcom has just closed its biggest deal yet, the acquisition of VMWare, and consequently has a heavy debt load. There is no way the deal would be accretive in year 1, Intel’s profits are just not sufficient. This deal would be read as dilutive by the Street, even if it might be slightly accretive by the end of 2025. (We have pasted the model at the end of the note for readability.)
Bankers have a solution for this sort of math – Synergies. How much will the combination of the two companies generate in cash flow that would not be available if the two companies remained separate? Normally, this is not a great way to build a case for an acquisition as it is so speculative that the Street tends to completely discount the synergy numbers. But this is Broadcom whose core competency is eliminating costs. Last year, Intel had $21 billion in operating expenses, which it says it will now cut to $20 billion in 2024 and $17.5 billion in 2025. Broadcom would likely come up with more cost savings, we looked at the model with a few billion dollars in synergies in 2025. At $3 billion, the deal would be breakeven and at $4 billion in synergies it would be mildly accretive, by 2025.
To be clear, this is not easy. Broadcom would almost certainly have to pay in stock, adding much debt to the deal would push their credit metrics into uncomfortable territory. And beyond just the mechanics of a deal, Intel Foundry’s funding needs and the whole company’s uncertain prospects would make this a very risky proposition for Broadcom, contravening many of the principles that have guided their acquisition strategy for years.
The problem anyone would have in acquiring Intel at this point is that there are no easy solutions, and the least bad plan is the one the company is implementing. We have to imagine that after last quarter’s results, activist investors are taking a look at the company. The problem they will face is that their usual playbook is not going to work here. Many activist deals hinge on the idea that companies can be split up and sold for parts. This idea has been circling around Intel for years, we wrote about the idea back in 2018, but by 2020 we came to realize that was not a good idea. Splitting Intel Products from Intel Foundry is an idea that looks good in Excel but really bad on the ground. The two entities are just too closely coupled. Maybe somewhere down the road, in the next decade, when both sides are healthy again, the Street can revisit that idea. For now, the company needs to time to right the ship, that will take time but there are no better options available.
AVGO for INTC – Base Case
AVGO for INTC – with Synergies
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