Intel the Gordian Knot

There was more “news” last week about Intel getting acquired. An industry analyst claimed that he “had been read a letter” which showed some unnamed company was in the process of buying the company. We are not going to link to that report because we are not certain about its accuracy, something in the language rings ‘off’ to us. Nonetheless, it sparked a surge in the company’s share price and a host of follow up coverage. This is not exactly news, Reuters reported this back in September, and to be blunt we trust Reuters’ sourcing a lot more. Going back even further, we speculated that Broadcom could buy Intel all the way back in May before things got really bad at Intel. We were only semi-serious about that idea, but this timeline has clearly entered reality-is-stranger-than-fiction territory, and it looks likely that Broadcom at least considered a bid. As we have been saying, Intel is in play, and anything is possible.

Well, not anything. There are only a handful of companies capable of buying Intel, and the two most likely have already taken a look and seem to have stepped away. There are also a dozen or so private equity funds who could afford it, but our sense is that they are taking a pass as well.

A takeover of Intel has become a Gordian knot. The big problem is funding the company’s fabs, which will will require tens of billions of dollars and years to get back on track. Few companies, and no private equity funds, really want to deal with that large of a funding need and time horizon. On the other hand, the US government has given Intel a lot of money, and so simply shutting down the fabs is deeply problematic. No one wants the fabs, but the company cannot be sold without them.

In theory, the new administration could give a buyer approval to shut the fabs, but if someone has enough political capital for that purpose, why not use that political capital to get some direct government support? In speaking with investors, our impression is that the Street assumes that the only way to save Intel is for the government to intervene. We maintain that this is not a hard requirement, but recognize that this is now the common perception of the situation. There are of course rumors that a certain highly-connected, deeply troubling, tech mogul has a plan to buy the company. And from the very narrow perspective of saving the US’s semis manufacturing capacity that may be what it takes.

We are increasingly convinced that the only way for Intel to survive is for someone to buy them and remove the board. Unfortunately for the company, and the semis industry, that path looks very challenging.