Perhaps Pat Gelsinger knows something investors and traders don’t, because he’s decided that Tower Semiconductor Ltd. is worth more money than the Israeli company has been valued at any time in the past 17 years.
At $5.4 billion, the Intel Corp. chief executive officer is paying over 35-times last year’s earnings and 60% more than it was worth at the start of the week. Lofty premiums can often be justified when the target is expanding quickly and is likely to grow into that valuation. Tower is not such a company.
A maker of chips for semiconductor clients including Analog Devices Inc. and Broadcom Inc., its revenue is projected to have expanded just 19% in 2021. That’s well below the 26.2% growth posted by the global semiconductor industry in what was a gangbuster year.
Yet Gelsinger is furiously driving Intel into a new future, one that has the world’s biggest maker of computer processors also manufacturing chips for outside clients. This foundry strategy will pit the Californian company against giants Taiwan Semiconductor Manufacturing Co. and Samsung Electronics Corp. Getting revenue from external customers would help Intel pay for the escalating cost of technology development and production capacity, an area where the once-mighty Goliath has faltered in recent years.
This deal, and that price, betrays his impatience.
Intel has announced a $100 billion expansion, including a new $20 billion facility in Ohio, but it will take a few more years for that capacity to come online. What the CEO seems to be doing is planting his foundry flag early in order to show the world he’s open for business, and convince governments in the US and Europe that Intel is their trusted partner amid concerns that too much of the chip industry is concentrated in Taiwan and South Korea.
“The acquisition helps Intel gain credibility as a force in the foundry business,” Bloomberg Intelligence analysts Mandeep Singh and Paula Penkal wrote after the announcement. “We believe Intel’s aim is to raise its strategic importance in Europe and with the US government, which is seeking to counterbalance dependence on East Asia foundries.”
Finding favor with national security and military decision-makers helps Intel make the case for governments to subsidize its expensive expansion plans. Last year the company announced it landed a deal to supply semiconductor foundry services to the US Department of Defense, part of its broader plan to win government contracts in the realm of military intelligence. Its purchase of Tower “will be nicely complementary to that strategy,” Gelsinger told investors after the deal was announced.
If there’s an upside to this acquisition, it’s that Intel will add to its own output while not increasing overall global supply. That may not matter much now, in a time of shortages, but could mean something in a few years when constraints are eased and chipmakers risk excess supply.
Buying, instead of building, is one of the smartest moves Intel could make right now as it seeks to establish its foundry credentials. But overpaying undermines such prudence, putting unnecessary risk back onto shareholders.
Bloomberg
