There is everything from bank debt to bonds, the only thing missing is ‘a plan to make a profit’

Intel spent two decades missing out on the next big thing. The chipmaker’s dominant PC business was so invasive that the company failed to see the opportunity in mobile phones in the 2000s.

More recently, the company has been slow to adopt ultraviolet lithography, an expensive chip-making process that was initially funded by Intel itself. Currently, Nvidia is dominating the hot artificial intelligence (AI) chip design market, becoming the most valuable semiconductor company in the world.

Like any iconic company falling on hard times, takeover rumors began to run rampant. Qualcomm, an American chip design company, is said to be interested in acquiring Intel. Apollo, a financial company, is also considering an investment here.

But whoever they are, they certainly face a difficult problem. The Intel Foundry operation, considered strategically important by US policymakers, is currently unprofitable. Huge and continuous investment is required to compete with TSMC, a Taiwanese chip manufacturing giant.

Overall, The Economist commented that Intel’s story is a wonder of American engineering. The company’s survival now also requires a financial engineering miracle.

Pat Gelsinger, Intel’s boss, admitted as much on September 16 when he said that Intel Foundry would become a separate subsidiary with its own board of directors.

The company’s separation of the business unit will convince potential customers that Intel’s manufacturing department is not completely dominated by its chip design department. At least that’s the theory. Only 1% of Intel Foundry’s revenue came from external customers in the first half of this year.

A headline-grabbing announcement that Intel would make custom AI chips for Amazon’s cloud computing arm failed to convince many that the company could shift from making its own chips to making chips for outside customers, as TSMC did.

Without profits to reinvest and saddled with $53 billion in debt, Intel increasingly relied on subsidies and private financing. The company has been promised more than any other company under the US CHIPS Act, legislation passed in 2022 to boost domestic manufacturing.

On September 16, the company was awarded up to $3 billion to produce chips for the armed forces, in addition to up to $8.5 billion in grants and $11 billion in loans announced earlier this year. In June, Intel said it would finance a factory in Ireland through a joint venture with Apollo, a major life insurance company.

“Intel has bank debt. Intel has government bonds. And currently, Intel has 11 billion USD investment-grade private credit (private loans in the form of investment),” Apollo’s director said. What the chipmaker doesn’t have, much to the chagrin of shareholders, is a credible plan to generate profits.

Neither the US government nor donors can fund Intel forever. But beyond laying off workers and delaying projects, Intel has few options to raise cash. One option could be to sell Altera, the programmable chip business that Intel bought for $16.7 billion in 2015.

Intel could sell the majority of its stake in Mobileye – although the auto technology company’s valuation will certainly reflect the current troubles in the auto manufacturing industry.

A radical deal involving a complete separation of Intel Foundry is difficult to imagine, given the company’s precarious financial position, even in the unlikely event that potential customers decide to invest in the business.

What about the ability to sell yourself?

Qualcomm, the company that designs chips for phones, acquiring Intel will be the largest deal in industry history. The deal would create a chip manufacturing giant – let’s call it Qualtel, Incomm or Americhip – with annual sales of $90 billion and create a huge new customer for Intel Foundry.

For US regulators, the perceived security benefits of a stronger combined company could allay antitrust concerns. “I think the US government will be a strong supporter of this deal – this deal will create a large US-focused company that they can then support very much,” said Angelo Zino of analyst firm CFRA Research.

However, any agreement will be difficult to implement. Qualcomm has no experience manufacturing or designing its chips using the architecture of Intel’s British competitor, Arm, and would struggle to afford such a deal. The company has $13 billion in cash and securities and its market value is less than twice that of Intel.

Regulatory agencies outside the United States will also oppose cooperation. Intel recently shelved a project in Germany, effectively scuttling Europe’s chip manufacturing ambitions; The continent’s regulators will be in no mood to help. That would send Intel back to square one, where things could get worse. However, taking no action is not a good option either.

According to: The Economist