In a deal Intel hopes will secure its dominant position as chip provider to the cloud, the semiconductor giant announced Monday that it is buying Altera for $16.7 billion.
Intel CEO Brian Krzanich promised “a set of products that don’t exist today” with lower cost and greater flexibility from combining the leading technologies of the two companies.
The cash deal ends a two-month-long courtship that sent San Jose-based Altera’s stock up sharply, and will pay the smaller chipmaker’s shareholders $54 a share, a 56 percent boost over the share price the day before negotiations were first reported in March.
The deal is another in a string of mergers and acquisitions reshaping the semiconductor industry. Last week, Avago Technologies, a Singapore-based chip company with operations in the U.S., announced the $37 billion acquisition of Broadcom, a venerable Irvine-based chip company.
Krzanich said the deal addresses two “growth segments” — the data center and the burgeoning Internet of Things, in which intelligence is added to cars, appliances and industrial tools in the form of tiny sensors and computers.
Santa Clara-based Intel clearly hopes the deal will help cement its current role as the leading supplier of processors that power data centers and the cloud infrastructure, one of the Santa Clara chip giant’s core product lines.
It’s also hoping to compensate for falling personal-computer sales, another key business. Intel’s PC business accounts for nearly two-thirds of its revenue, while the data-server business accounts for slightly more than 25 percent.
The much smaller Altera — with 3,100 global employees to Intel’s 107,000 — makes a chip called a Field Programmable Gate Array, or FPGA, that is beginning to find its way into data center servers, where Intel processors dominate.
The Altera chip can be reconfigured by customers after purchase, making it a useful partner for tasks now done by processors.
Altera’s technology will be offered to Intel’s customers and will lead to new types of products, Krzanich said in a conference call. Two applications he mentioned were facial search and encryption, which could eventually be done on the same programmable chip.
Krzanich said that Intel will be able to offer Xeon chips containing Altera’s programmable logic device around 2017, doubling performance while lowering costs in conformance with Moore’s Law, which calls for the shrinking of transistors to double the number on a chip every two years.
“The deal makes sense for a number of reasons,” said analyst Jack Gold. Altera is already using Intel’s foundries, he said, and “even more important, Intel is trying to branch out and be in as many markets as it can, given that the chip business is much different than it was years ago. It is much more cutthroat. The final piece is that the market is consolidating,” Gold said.
The deal is expected to take six to nine months to close. In the meantime, Altera will operate as an independent company.
In April, Altera rejected a similar offer from Intel after talks that began in March.
On Monday, Altera shares closed at $51.68, up 5.79 percent. Intel shares closed at $33.90, down 1.61 percent.
The acquisition eclipses the $7.6 billion Intel paid for McAfee in 2010.
Some analysts saw the deal as a defensive move, with Intel trying to stave off competitors who might try to take a piece of the server market with technology based on designs licensed from ARM, a British company whose technology has been used by other companies to dominate the smartphone market.
“Intel cannot afford to see market share erosion in its key data center business,” Baird Equity Research said in a note about the deal.
Krzanich denied it was a defensive move. “We look at this in both the Internet of Things and the data center as expansive,” he said. “These are products our customers want built.” He estimated that 30 percent of cloud workloads will be on the type of products Intel will make in the coming decade.
A deal like this couldn’t have happened five years ago, said Pat Moorhead of Moor Insights & Strategy. That’s because Altera’s programmable chips were too large to fold into a processor. But as transistor sizes shrink to 10 nanometers, it will be possible, he said.
“As you can make them smaller, it makes sense not only to put them inside a processor, but also to use them in more applications,” he said.
Altera CEO John Daane said in a statement that the deal “provides immediate and significant value to our stockholders. We look forward to working closely with the Intel team to ensure a smooth transition and complete the transaction as quickly as possible.”