Intel's Infineon wireless acquisition: Why so cheap?

Will Strauss, President & Principal Analyst, Forward Concepts

USA: The announced $1.4 billion Intel acquisition of Infineon's Wireless Solutions Business (WLS) is only 1x annual revenues, and some Wall Street analysts consider this a "fire sale." Why so cheap?

I've read the scenarios by Wall Street and the European press that the divesture will allow the surviving Infineon Technologies AG to better concentrate on its more profitable automotive and industrial chip business, but I don't think that's the whole story.

My theory is that Infineon is aware that Verizon will be fielding a CDMA version of the iPhone rumored to be introduced next January. A CDMA version of iPhone would certainly require an advanced Qualcomm 3G modem, essentially letting the QCOM camel "get its nose under the tent," perhaps displacing some of the Infineon modems destined for future iPhones.

It's unlikely that Intel WLS will see its Apple iPhone socket disappear, but the CDMA segment of the market (viz, Verizon, Sprint, KDDI, etc.) would not be available to Intel's cellphone modems. If the QCOM/Verizon approach proves to be successful, can iPad be far behind, especially with QCOM's Gobi modem, allowing the user to select either CDMA or UMTS carriers. Since QCOM also is a major supplier of UMTS modems, they could even eat into the main Intel WLS iPhone market.

If my speculation is correct, Intel's due diligence would have already confirmed it and Intel's bid price adjusted accordingly.

How will Apple react?
Once upon a time, Apple's desktop computers were based on (IBM-heritage) PowerPC processors provided by Motorola's Semiconductor Products Division. But Moto couldn't keep up with the demands (both volume and performance) that Apple required.

Consequently, Apple changed its desktop product line to run on better-performing and predictable-delivery Intel Pentium processor chips. That simply indicated that Steve Jobs, Apple's CEO and visionary, doesn't mind changing horses when necessary. Apple's acquisition of PA Semi and its (perhaps unrelated) introduction of the (Samsung-fabricated) A4 processor employed in both iPhone 4 and iPad, indicates that Apple is looking to eventually "own" its mobile processors.

Will being a slave to Intel for both its desktop and mobile processors sit well with Apple? I don't think so. Qualcomm could look very attractive to Mr. Jobs for future mobile planning.

New Intel acquisition binge?
Intel is fast approaching the $10 billion level that they wasted from their 1998-2001 communications company acquisition binge. Level One Communications, the company's first big communications acquisition, for which Intel paid about $1.7 billion, is no more. DSP Communications was purchased for about $1.6 billion and led to a write-off of $600 million and a later sale to Marvell for another $600 million. Probably, the most egregious acquisition was VxTel for which Intel paid $550 million for and later sold for under $1 million.

But there were others: Xircom ($748 million, which was shut down after a couple of years), Trillium Digital Systems ($300 million, sold later for about $10 million), GigaA/S ($1.2 billion, fate unknown) and Dialogic ($780 million, but since spun out as a going concern).

But, hey, that was under previous executive managers, all of whom were technologists. Paul Otelini, the current President and CEO, has degrees in economics and business management, so it is clear that there is a different mindset at Intel now.

Under its new management, Intel is pushing back into the cellular chip business (buying ComSys Mobile and Infineon's cellular chip business), wireline communications (buying TI's cable modem business) and now, security software (buying McAfee Inc. for $7.7 billion).

But Intel is not alone in an acquisition binge. Recently flush with cash or higher stock prices, a number of bigger chip companies are setting records in acquisitions over the past six months or so. On Semiconductor, Marvell Technology, Micron, Microchip Technology, Synopsys and others have made acquisitions to either strengthen existing product lines or to expand their portfolios into new markets. And the acquisition party shows no signs of slowing down.

Source: Forward Concepts Wireless-DSP Newsletter, USA.