Intel Acquires Altera: Is Xilinx In The Crosshairs?

  • Intel will, after all, acquire FPGA-maker Altera in what will be Intel's largest acquisition ever.
  • Intel is looking to use Altera's FPGAs to build hybrid Xeon/FPGA processors for use in datacenters.
  • Xilinx, a company that shares a duopoly with Altera, is likely to catch the interest of Intel's server chip rivals.
Intel acquires Altera

After what had earlier looked like a botched merger attempt, news is now in that Intel (NASDAQ:INTC) will, after all, acquire leading FPGA, or field-programmable gate arrays, maker, Altera Corporation (NASDAQ:ALTR) for $16.7 billion, making it Intel’s largest acquisition ever. The proposed merger had at first appeared to have fallen through after Intel ostensibly failed to meet Altera's demands. Though the deal might still face regulatory hurdles by the FCC, chances of sailing through are high since there is no product overlap between the two companies.
Even as Intel Acquires Altera, the ramifications for Xilinx (NASDAQ:XLNX), a company that shares a virtual FPGA duopoly with Altera, and on the FPGA industry are of tremendous importance.

Xilinx Could be an Attractive Acquisition Target

Altera and Xilinx are the two largest programmable logic device, or PLD, manufacturers, with Altera owning 39% of the market while Xilinx commands an even bigger 50% share. The PLD market is still rather small, and accounts for just 2% of the $300 billion semiconductor market. FPGAs, a subset of PLDs, make up the largest part of this market. The FPGA market was pegged at $4.6 billion in 2013 and is projected to grow at 8.1% CAGR to hit $8.5 billion by 2020.

Comparing Altera and Xilinx’s revenue and respective valuations, one thing is abundantly clear: Altera is certainly expensive. Altera sports an enterprise value of $13.26 billion and finished fiscal 2014 with sales of $1.93 billion. Intel will pay $54/share for Altera, or about 10% premium to current price and a whopping 56% premium to Altera’s price before the merger was first announced in February.

In comparison, Xilinx has an enterprise value of $10.52 billion, 26% lower than Altera’s reading, yet finished fiscal 2014 with revenue of $2.38 billion, 23% higher than Altera’s sales. Holding all other things constant, a company acquiring Xilinx would pay 26% lower than what Intel will pay for Altera. To sweeten the deal even further, such a company would get a much cheaper deal courtesy of Xilinx’s superior sales.

But, which companies would be interested in acquiring Xilinx? Quite a number. Intel intends to use Altera’s FPGAs as accelerators in its Xeon processors. The company managed to produce the first FPGA/Xeon hybrid chips last year. You can bet that ARM-based chip manufacturers will be looking to at least match Intel’s faster datacenter chips. Xilinx would be a perfect complement for an ARM company since it licensed ARM Holdings (NASDAQ:ARMH) Cortex processor IP back in 2009.

Avago Technologies (NASDAQ:AVGO), IBM (NYSE:IBM) and Qualcomm (NASDAQ:QCOM) are all possible merger candidates. IBM in particular looks like a likely candidate since it owns design for Power chips that are used inside specialized servers. Power chips can easily be married with FPGAs. IBM released the designs of its Power chips into an open source project last year, allowing any company to use them in their own servers. Acquiring Xilinx would bring the technology in-house and help these companies compete with Intel better.

Bigger Addressable Market

Xilinx can still benefit even if it does not end up being acquired. As more server chip manufactures start marrying FPGAs with their server chips, Xilinx is likely to see more business. FPGAs are currently mainly used in a narrow context where they are used to prototype new ideas before locking the final design into silicon due to their high flexibility. Using them as accelerators in server chips can increase the addressable market for Xilinx.

Tech companies with massive datacenters such as Microsoft (NASDAQ:MSFT) have started experimenting with FPGAs as a way to accelerate their servers. Microsoft has been experimenting with FPGAs by using them in its datacenters to speed up Bing Search.

Bottom Line

Xilinx can easily become the acquisition target of server chip manufactures that compete with Intel. The company has a cheaper valuation than Altera despite the fact that it sports better sales, thus offering an attractive value proposition for bidders.

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