The Intel (NASDAQ: INTC) rose by more than 1% as investors welcomed the leak that the company was planning to spend $30 billion to acquire GlobalFoundries. The stock rose to $56 in the premarket, bringing its total market capitalization to more than $225 billion.
Intel to acquire GlobalFoundries
According to the Wall Street Journal, Intel is in advanced talks to acquire GlobalFoundries. This will be Intel’s biggest acquisition after the $16.75 billion the firm spent in acquiring Altera.
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The decision to acquiring GlobalFoundries will see Intel increase its market share in building chips for other companies, including AMD. It will also increase competition with Taiwan Semiconductor, the $609 billion company.
In its report, WSJ said that the talks did not include GlobalFoundries executives meaning that it is unclear whether the firm will be open to be acquired. At the same time, the rumours of the acquisition could lead to a bidding war from private equity companies. GlobalFoundries is owned by Mubadala, which bought it from AMD in 2008.
The talks come at a time when the world is facing a major chip shortage that has affected the automobile and electronics sectors. At the same time, they come a few months after Intel committed to invest $20 billion in US chipmaking.
Further, the talks come at a time when Intel is struggling. The Intel stock price has crashed by more than 18% from its highest point this year. The company recently postponed the release of a major data centre chip, meaning that AMD will likely gain market share.
Implications of an Intel-GlobalFoundries merger
GlobalFoundries is a private company, meaning that its numbers are not public. Still, we know that the foundry business is a highly profitable one. For one, Taiwan Semiconductor has a gross profit margin of 53.21% and a net profit margin of 38.86%. On the other hand, Intel has a gross and net margin of 54.62% and 23.93%, respectively.
Still, I don’t think this decision will be in Intel’s interest. For one, we have all seen how well AMD has performed after spinning the company off.
Second, there are concerns about the debt that Intel will raise to fund such a deal. Intel has more than $23 billion in cash and a long-term debt of more than $33 billion. This means that the purchase will be in form of cash, debt, and equity.
Third, in most cases, giant acquisitions tend to fail. For example, IBM’s share price has lagged its big tech rivals after its acquisition of RedHat.
Finally, and most importantly, I think that Intel should spend its resources in addressing its key issues. For example, it could do a better job in being ahead of AMD and Nvidia. By so doing, the company will be addressing the root cause of its long history of underperformance.
Intel stock price analysis
The daily chart shows that the Intel stock price has struggled in the past few months. The situation will likely get worse considering that the shares are close to forming a death cross. This is where the 50-day and 200-day moving averages make a bearish crossover. The stock has also formed what looks like a bearish pennant pattern. Therefore, I suspect that the Intel share price will break out lower.
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