Intel is in talks to buy chipmaker Altera Corp.

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Intel

Intel is in talks to buy chipmaker Altera, in what would be its largest ever acquisition, according to the Wall Street Journal. Analysts said that Intel will need to spend more than $13 billion in the deal. But in terms of revenue, buying Altera isn’t going to make much difference to Intel’s bottom line and existing $55 billion in sales, as analysts say that around $2.1 billion (4% of revenue) will be added to the company’s revenue.

Intel could spend up to $13 billion on Altera

Why does Intel want to spend so much on Altera? The reason is to grow its data centre businesses. The majority of Intel’s sales come from its PC unit, and it has been attempting to diversify its revenue for years, with mixed results. In 2014, Intel’s mobile business in fact lost $4 billion and the company will now no longer break out individual results for that division.

However, Intel’s data centre business brought in more than $11 billion in sales (25% of the total) last year. Altera’s acquisition should help Intel to solidify a lead in this space and reduce reliance on PC sales.

“We believe that Intel views Altera’s technology as strategic in the data center (where Intel holds 95%+ share)”, Macquarie Capital wrote in a note to investors.

Altera

Altera is know for its Field Programmable Gate Arrays (FPGAs) – a special kind of chip that can change functionality after it has been manufactured, unlike regular chips which are unable to repurpose their tasks once created. In data centres, FPGAs are growing in popularity as they can be reconfigured for specific uses.

Intel believes this market has room to grow. According to Altera’s annual report, the Programmable Logic Device (PLD) market (of which FPGAs are a part) is estimated to be worth around $5 billion. However, when including other segments that PLDs compete with such as Application Specific Integrated Circuits (ASICs), the entire addressable market is over $50 billion.

“Due to the high barriers to entry of PLDs, Altera has long been known to have some of the highest margins in the semiconductor industry with 2014 gross margins of 66.4% and 2014 operating margins of 28.1%”, Citi Research claims.

SOURCE: Wall Street Journal

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