Intel-Altera Merger Given The Nod By EU Regulators

  • EU regulators have approved Intel's proposed merger with FPGA maker Altera.
  • The deal, valued at $16.7 billion, will become Intel's largest merger deal to-date.
  • Why is Intel interested in buying out Altera?

EU regulators have approved Intel's (NASDAQ:INTC) buyout of FPGA maker Altera (NASDAQ:ALTR) for $16.7 billion just a month after the merger received clearance from the DOJ in September. Altera will become Intel's largest acquisition to-date. Altera and Xilinx (NASDAQ:XLNX) share a duopoly in the field-programmable arrays market with a combined market share of about 90%. The buyout price represents a huge 40%+ premium to Altera’s market cap just prior to the announcement of the merger, and a rich 8.7 x Altera’s 2014 sales. So why did Intel opt to buy a maker of old-line FPGA products for such a sum? And why didn’t Intel buy Xilinx instead which seems to offer a much better value proposition compared to Altera. Xilinx finished 2014 with sales of $2.38 billion and an enterprise value of $9.98 billion. If Intel paid a 40% premium for Xilinx, it would cough up $13.97 billion or just 5.9 x sales, for the company.

Competing with the ARM camp

Perhaps the biggest apparent reason for the Intel-Altera merger is to prevent the company falling into the hands of an ARM rival. Both Xilinx and Altera started manufacturing CPU/FPA hybrid processors about two years ago. Integrating FPGAs into microprocessors yields a pretty dramatic performance gain, a critical consideration for data center servers.

Intel servers have traditionally held a sizable lead over ARM-based servers due to superior performance. When ARM servers made their debut, their strongest selling point was their low power consumption. Power costs make up the biggest cost element in running a data center. ARM-based servers became quite popular which helped ARM servers to grab as much as 25% of the server chip market by 2016.

But Intel responded to the ARM threat by introducing low-power Atom processors and introduced multi-core Xeon processors with enhanced performance. Intel was able to grab back almost everything that ARM had managed to wrestle from it. Currently, Intel’s x86 processors command more than 99% server chip market share.

But this does not in any way mean that ARM has been completely vanquished. Despite not having a significant presence in the data center space, ARM processors are widely used in mobile devices and computing devices that require low power such as notebooks. ARM processor manufacturers discovered that by marrying CPUs and FPGAs, they can build much faster processors with just a small increase in power consumption. A server processor that rivals Intel’s existing server processors in performance while maintaining ARM’s low power advantage is of course a big threat to Intel.

Large tech companies such as Microsoft (NASDAQ:MSFT) and Baidu (NASDAQ:BIDU) have already started experimenting with CPU/FPGA hybrid processors. Microsoft says that it used FPGAs in its data centers to speed up Bing Search. The company said that integrating FPGAs into its servers produced a 95% performance gain with a mere 10% increase in power consumption.

Meanwhile, Baidu has been using FPGAs in its storage controllers that handle massive amounts of data.

Preempting ARM strikes

Intel has already started manufacturing CPU/FPGA hybrid processors. The company announced in 2014 that it had successfully produced hybrid processors jointly with an unnamed FPGA manufacturer (in hindsight the manufacturer appears to have been Altera) only that this time the hybrid processors used Intel’s x86 processors and not ARM processors. For Intel to have preferred buying Altera instead of simply sourcing FPGA products from the company tells you that the company most likely sees a future where CPU/FPGA hybrid processors will become pretty commonplace in the data center. By buying Altera, Intel will bring Altera’s FPGA knowhow in-house and ensure that it can keep up with any advances by the ARM camp. After all, the company can hardly afford to become complacent again and allow ARM to outgun it in the data center race, the way it did a decade ago.

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