Should Intel Buy NVIDIA?

As each day passes, it seems that Intel (NASDAQ: INTC  ) , the world's leading CPU and semiconductor manufacturer, should scoop up NVIDIA (NASDAQ: NVDA  ) , the world's leading graphics processing unit company -- or, as NVIDIA likes to call it, "visual computing."

Many may disagree, contending that Intel's own in-house GPU teams may be the demise of NVIDIA. But the results so far haven't pointed to that at all.

The obvious: what Intel gets
If Intel took out some relatively cheap debt to finance an acquisition -- at a 50% premium, NVIDIA would cost Intel about $13.5 billion, or just under a year's worth of free cash flow -- it would immediately get the following:

  • The world's best graphics IP, bar none, and it would no longer have to pay royalties to use NVIDIA's patents.
  • A business that generates about $650 million per year in free cash flow. This would be immediately accretive even if Intel had to borrow $13.5 billion at 3% interest to do it.
  • A near monopoly in the high-performance accelerator space. AMD is no threat.
  • A patent IP that may be more easily monetized under Intel's wing. It's easier to go to war with the likes of Qualcomm when you're Intel than if you're NVIDIA.
  • One fewer competitor in the mobile system-on-chip space, as well as the in-vehicle infotainment space. That could lead to higher margins.

The downside is that if Intel did this deal with debt rather than with stock, it would probably leave the company's balance sheet in a meaningfully worse position. Given the threats to its PC-chip cash cow, that may not be the best plan at this time.

What about NVIDIA?
Assuming that Intel took the company out for a 50% premium to the most recent close of $15.73, NVIDIA shareholders would get about $23.60 per share. Since NVIDIA would likely perform its fiduciary duty and try to make a sweet deal for all of its recent shareholders, it would probably really fetch more along the lines of $26 per share, or a 65% premium. What's a few billion to Intel, particularly if it is able to do this deal in stock?

The downside to doing this deal is that some investors may believe the shares are worth well north of $26. Indeed, during the 2007 peak, the company's shares actually traded for $37 apiece -- a 42% premium to this potential takeover price, which itself would be a 65% premium to today's price.

While the shares could very well get there over the next few years if the stars truly align, it'd take some pretty aggressive -- and unexpected -- free-cash-flow growth to justify that on a discounted-cash-flow basis. However, NVIDIA's patent portfolio and its brand have some very clear value that is not necessarily captured in a DCF model.

Foolish bottom line
From a strategic perspective, Intel buying NVIDIA makes perfect sense. The only issues that stand out against this deal stem primarily from Intel's inability to pay for it without either issuing a bunch of stock or taking on a hefty amount of debt. It may turn out to be easier on Intel's balance sheet to continue developing its own technology, but a deal would offer strategic benefits beyond NVIDIA's world-class IP.

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Read/Post Comments (5) | Recommend This Article (0)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 13, 2014, at 5:32 PM, rustianowski wrote:

    AMD still competes on the high end. I am not sure where you got ythis skewed information from. In a real gaming scenario on high end, meaning using VOIP and streaming and AMD FX8350 not only is on par with Intel but pulls ahead. Most reliable gamers and testers can even depict this. The only time intel truly wins is if you are running a single game and no other applications. However, this is impractical as now nearly all gamers stream and use VOIP services as well as using media and multiple monitors. This practice utilizes more cores and performs better on an AMD.

    AMD also easily competes with Nvidia. Please stop writing opinions, and stating them as facts.

  • Report this Comment On January 13, 2014, at 6:09 PM, rustianowski wrote:

    To add actual facts to my information.

    https://www.youtube.com/watch?v=eu8Sekdb-IE

  • Report this Comment On January 15, 2014, at 1:48 AM, rav55 wrote:

    The Justice Department denied the AT&T acquisition of T-Mobile as not being in the best interest of the consumer.

    It is highly likely that Intel would not be allowed to acquire the largest GPU maker and 3rd largest ARM cpu maker for the very same reason.

    Intel has already been sued and settled for engaging in Monopolistic business practices and numerous other dirty deeds bordering on criminal acts.

    My money is on DENIED! At the very least I do not see an Intel acquisition of nVidia without granting AMD full property rights to x86 and the Intels compiler.

    No a likely scenario would be for Intel to acquire AMD while granting an x86 license to nVidia to maintain the x86 balance. nVidia certainly would have the resources to be competitve in the x86 market however bringing a IGP processor to market would still take 2 years and a fully integrated IGP competitiev with Kaveri would probably take 3-4 years.

    Even if Intel did acquire nVidia say if they transferred the x86 rights to AMD whole and complete as property it would still take Intel years to put a decent IGP on the market.

    All the while AMD is not standing still.

    No Intel IGP is laughable.

    And will likely stay that way.

  • Report this Comment On January 15, 2014, at 1:12 PM, rav55 wrote:

    Even the Intel and NVidia fanboys smell the stank on this piece of junk journalism.

  • Report this Comment On January 15, 2014, at 3:03 PM, serendip7 wrote:

    The biggest problem is that Jensen won't sell and although he only owns 3-4% of the company, the senior management at Nvidia are all long term employees, have extensive history with Jensen and are likely to vote however he wants.

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