Intel’s purchase of Altera is just for starters

Intel's $16.7 billion (€15.3 billion) purchase of programmable chipmaker Altera is likely to be a model for future big acquisitions at the company as the semiconductor industry's merger boom continues, according to tUS company.

The acquisition, completed on Monday, is the biggest ever undertaken by Intel and marks an acceleration in its efforts to move beyond the shrinking PC business.

Acquiring Altera’s customisable chips, used in equipment such as communications and industrial automation gear, reflects chief executive Brian Krzanich’s plan to use Intel’s huge manufacturing scale and command of the industry’s most advanced processes to increase its market share.

The acquisition is also intended to strengthen Intel’s position in the data centre market and the internet of things, as it tries to move faster to break its traditional dependence on PCs.

Wendell Brooks, a former Allen & Co banker who was brought in to head mergers and acquisitions at the chipmaker in 2014, predicted that the growing manufacturing challenges faced by smaller players would force more consolidation and feed Intel’s growth as it moves into new markets.

“We are looking for adjacencies where we can bring our process advantage to bear,” he said . “Altera is a great first acquisition.”

Most of Altera’s chips are produced by Taiwanese chip foundry TSMC, though it has been working with Intel to move to the US company’s 14 nanometre technology, and the deal has been seen as a way to secure a captive customer for Intel’s plants.

Intel also plans to combine Altera’s customisable chips with its own standardised semiconductors to produce more efficient semiconductors for tasks such as internet search and machine learning.

The first fruits of this are slated for 2016, with semiconductors for data centres that will package the two companies’ chips in a single product. While these could bring a 50 per cent boost to performance, the more significant advances will not come until the two companies’ technologies are fully integrated on a single piece of silicon, something that will take several years to achieve, Mr Brooks said.

Meanwhile, the acquisition will be the first big test of Intel’s ability to integrate a large chipmaker. That makes it a model for future acquisitions as the company looks beyond its traditional reliance on in-house development, Mr Brooks indicated.

“We’re doing things very differently than we have in the past,” the Intel executive said.

The Altera deal, announced in June, was part of a spate of giant chip acquisitions agreed in 2015. They were capped by Avago's $37 billion offer for Broadcom, one of the biggest acquisitions ever announced in the tech industry. Most of the deals have been prompted by cost-cutting as consolidation sweeps through the semiconductor world, said Mr Brooks, with only a minority, including the Altera deal, bringing expansion into new markets.

“The market very much rewards companies like Avago that are leading the charge,” he said. “I think the impetus will continue.”

- Copyright The Financial Times Limited 2015