Intel’s share price rose by nearly 10% on Friday after a report by Bloomberg that the company’s board would consider strategic measures to deal with its liquidity problems, among them the sale of divisions and splitting the company into two separate entities, one for production and the other for chip development.
Intel is currently conducting a rearguard action to protect itself against moves such as a hostile takeover of the board by shareholders, after delays in the strategy of CEO Pat Gelsinger of opening up Intel’s production capacity to competing companies. Meanwhile, the company is hemorrhaging cash and losing market share faster than it had thought.
Gelsinger became CEO in 2021 aiming to focus on two main processes: a technological quantum leap that would help Intel compete with Taiwanese company TSMC in production, and opening up of Intel’s production capacity (which up to then had only produced for Intel itself) to attract competitors such as Nvidia and AMD.
Gelsinger took up his post in a euphoric period as far as sales of personal computers were concerned, but since then the pace has slackened, and the plan to join in the AI revolution through Intel’s Gaudi chips also failed. Cash flow became negative, gross profit margins declined, and Intel began to delay the construction of factories in Israel and Germany , and to raise capital from private equity funds for construction of factories in the US and Ireland
Intel investors have been pressing Gelsinger to spin off Intel’s production business and turn it into an independent company, whether through a stock exchange flotation or through a sale to a third party. It appears that Glesinger, who was opposed to the idea, is now considering it. "It makes sense," Orr Danon, CEO and founder of chip company Hailo Technologies told "Globes". "Western countries, headed by the US, are keen to see an American company that will responsible for their production, since at present the default is production in Asia. The question should be put the other way around: Why are these two businesses, production and development, linked together at all? Why should a company that produces for other companies maintain such an internal customer?"
The split has not occurred up to now, not just because of a desire to maintain financial independence, but also apparently because of inefficiency. TSMC, which deals only in production, has a gross profit margin of 53%, while Intel reports just 35%. Intel has put on a lot of fat that is proving hard to remove, and it may be that only structural separation will enable it to do so successfully.
Not the first to split
If Intel does decide to split, it won’t be the first. In fact, the pressure being brought to bear on it by investors stems from the success of AMD, which, in 2008, spun off its production business and sold control of it to UAE-based Mubdala Investment Company. The spun-off company, which was eventually renamed GlobalFoundries, is now the third largest chip manufacturer in the world, with a market cap about a quarter of that of Intel.
AMD and GlobalFoundries had a difficult start as separate companies. At the beginning, the committed to working with each other, but their ways parted, and today each operates separately. AMD sold all its shares in GlobalFoundries, which was floated, became a leading chip manufacturer, and today cooperates with Google and even recently won a prestigious production tender for the US Department of Defense.
AMD underwent several difficult years, and in 2014 reached a position similar to that of Intel today. The CEO was replaced by Lisa Su, who introduced a strategy of developing high-performance computing and graphics technologies, a strategy that succeeded in taking market share from Intel and Nvidia. Investors showed their appreciation: AMD’s share price has risen by 7% so far this year, and the company is now worth 2.5 times more than Intel.
With all the good intentions, analyst Ian Cutress isn’t sure that a spin-off at Intel is even possible, pointing out that the production business suffers from losses, and many of the production lines are only suited to Intel technology, and developing them so that they will be able to produce for all the companies will probably only be complete in 2027.
Impact on Israel
How will splitting up Intel affect Israel? First of all, as long as the war continues, expansion in Israel will continue to be low priority. Last week, the company cut its budget for leased cars for its employees in Israel and the startups accelerator Intel Ignite. A split will mean selling at least one division to another company or a private equity fund that will inject finance.
It is probable that that the independent production set up will remain in the hands of the original management and shareholders. Intel has strategic value for the US government, which will be able to inject aid into it if only to continue to make it possible for it to manufacture chips on US soil. In that event, everything outside the US will drop down in the order of priorities, which could halt expansion of the factories in Israel. The roughly 4,000 workers employed in Intel’s Israel production network will be in danger of cutbacks.
Intel also has development activity in Haifa and Petah Tikva, employing over 7,000 people. "An injection of money from a wealth fund will give the development activity breathing room," says Orel Levy, tech funds adviser at More Investment House. "It’s conceivable that it will be acquired by another chip company, and Broadcom has a high chance. It wants to expand its activity in servers, it has a healthy balance sheet, and it’s active in Israel. The reservation about its ability to make such an acquisition is that it is still digesting the acquisition of VMware."
Published by Globes, Israel business news - en.globes.co.il - on September 2, 2024.
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