Intel's Altera Acquisition Getting Mixed Reaction: What Wall Street's Saying

NEW YORK (TheStreet) -- Intel's (INTC) bid to buy fellow chip maker Altera (ALTR) may have sent both stocks up Monday, the day it was announced, but analysts are split on the long-term impact of the deal on Intel's stock.

The offer is valued at $54 a share, or $16.7 billion, and would strengthen Intel's server-focused subsidiary, Data Center Group, at a time when the company's rivals are focusing on producing chips for mobile devices. 

While Data Center Group's revenue went up by 19% year over year to $3.7 billion in the first quarter, revenue at Client Computing Group, the company's largest unit, dropped 8% year over year to $7.4 billion. For the quarter, that left Data Center Group with operating income of $1.7 billion and Client Computing Group with $1.4 billion.

Intel shares recently fell 1.6% to $33.34 while Altera shares were flat at $51.73.

There was no broad-based consensus on the deal from analysts, though some highlighted growth potential in data center profits as cause to invest in Intel.

Here's what a few had to say:

BMO Capital Markets analyst Ambrish Srivastava (Market Perform, $33 PT)

"We do not like Intel's acquisition of Altera. We really do not see the opportunity/rationale that Intel is laying out for parting with ~$17 billion. Specifically, we do not concur with Intel's assumption of 7% CAGR for the business. Altera has grown at a negative CAGR of 2% in the midst of one of the more aggressive carrier CapEx builds we have seen. We do not like the valuation that Intel is paying for ALTR, especially in light of our view of the opportunity. On a stand-alone basis, we view ALTR to be worth $28. We are struggling with how this deal will add value to shareholders in the long term."

Pacific Crest Securities analyst Michael McConnell (Overweight, $37 PT)

"We view Altera as a strategic and synergistic fit for Intel and remain positive on the deal. Conversely, we see potential negative impacts for TSMC and Nvidia (NVDA). We also view this acquisition as positive for Xilinx (XLNX), as we believe Xilinx will benefit from the data center opportunity in the longer term and will likely be forced into consolidation. We think these trends are underappreciated."

Canaccord Genuity analysts Matthew D. Ramsay and Steven Lee (Buy, $39 PT)

"While we anticipate modest near-term synergies, we believe the addition of more customizable server SKUs where customers can still control their own algorithms could add high-margin growth potential for DCG in areas including search, analytics, and government. While the price tag appears steep, the acquisition does not change our overall bullish long-term fundamental thesis as we begin meetings with Intel management and PC supply chain participants at Computex in Taiwan today that should shed light on whether Windows 10 and new Skylake production launches can drive the more robust 2H/15 PC implied by Intel's full-year guidance."

Credit Suisse analyst John Pitzer (Outperform, $40 PT)

"We have mixed views on the acquisition specifically on the more critical side: (1) valuation appears rich - we estimate a buyback would be $0.25-0.40 accretive, INTC appears to be paying > 20 years of accumulated ALTR operating cash flow, (2) INTC's expected future Rev CAGR of ~7% for ALTR appears aggressive vs. ALTR's CAGR from 2010-2015 of negative 2.7%, and dilutive to INTC DCG/IoT CAGR of ~14%/~18% respectively, and (3) manufacturing synergies are apparent but only relevant to N+ technology which is expected to only be ~10% by 2018. More than offsetting these concerns: (1) even if only defensive (note Company says offensive) protecting DCG footprint should be a strategic imperative, (2) SAM expansion of $11 bb in IoT is under-appreciated by investors, (3) discrete acceleration application is at least a $1 bb TAM but integrated FPG/CPU likely opens up new applications, price points, ROI especially since DCG is NOT performance saturated, (4) ALTR is a long duration asset in a stable duopoly with better than industry margins and CF, and (5) our world view of Semi Rev to Global GDP inflecting higher would argue a "land-grab" strategy is likely to have significant future returns. Reiterate OP and $40 TP."

Jefferies analyst Mark Lipacis (Buy, $48 PT)

"Intel is paying a premium for ALTR, but the deal highlights Intel's data center profits, which we forecast will exceed client computing for the first time in 2017 and signal a shift of Intel to a "Data Center" from "PC" play. We also believe it highlights challenged leading edge fabless business models and view it as a milestone for our 2012 Moore Stress thesis that argued the balance of power would shift to IDMs from leading edge fabless companies."

MKM Partners analyst Ian Ing (Buy, $40 PT)

"Intel's deal to acquire ALTR (NR, $51.68) for $16.7B, $54/sh in cash, is a clear sign in our view that efficient semiconductor models are reverting to manufacturing vertical integration (much like in the early 90s). This is driven by the needs of a few mega-customers centered around mobile devices and infrastructure equipment with their increasing demands for performance-for-cost (better served with integration and margin stacking). We continue to think the remaining fabless players will rush to get onto the acquisition train or else face larger competitors with outdated business models."

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