Intel's (INTC +0.49%) stock recently rallied after a few news reports suggested that peer Qualcomm (QCOM +0.29%) was interested in buying the struggling chip giant. Such a merger would be the largest semiconductor sector deal in history since Intel still has an enterprise value of $124 billion. It could also be a game-changer for the industry, bringing Intel's x86 PC and server CPUs under the same roof as Qualcomm's Arm-based mobile chips.
On paper, the marriage would make sense. Intel is the world's top producer of x86 CPUs, and Qualcomm is the second-largest producer of mobile systems-on-a-chip. (SoCs) after Taiwan-based MediaTek. Qualcomm could use Intel's foundries to manufacture its own chips, and it could add Intel's valuable IP to its own portfolio of royalty-generating wireless patents.
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But in reality, a takeover bid could be scuttled by antitrust regulators who don't want a single company to dominate the x86 and Arm chipmaking markets.
In addition, integrating Intel's lower-margin foundry business would crush Qualcomm's operating margins, and as a buyer, it would significantly increase its own leverage by absorbing Intel's $48 billion in debt. Qualcomm would also need to issue a lot of new shares to cover the acquisition.
So for now, it seems unlikely Qualcomm will pursue a takeover of Intel -- which is still struggling with slowing sales, declining gross margins, and a lack of progress in its efforts to catch up to Taiwan Semiconductor Manufacturing (TSM 1.84%) in the high-end foundry market. However, Qualcomm's rumored interest might still portend trouble for TSMC for two simple reasons.
Qualcomm might evolve into a competing foundry
Qualcomm is a fabless chipmaker, meaning it designs chips, but outsources its production to third-party foundry operators like TSMC and Samsung. TSMC doesn't disclose exactly how much revenue it generates from Qualcomm, but ExploreSemis analyst Sravan Kundojjala previously estimated the mobile chipmaker accounted for 9% of TSMC's revenue in 2022.
In the second quarter of 2024, TSMC generated 33% of its revenue from chips produced for the smartphone market. Counterpoint Research estimates Qualcomm controlled 31% of the mobile SoC market in the same quarter -- just 1 percentage point below MediaTek's share. Assuming TSMC also generated 31% of its smartphone revenue from Qualcomm in that quarter, the mobile chipmaker would have accounted for about 10% of the contract chipmaker's top line.
But if Qualcomm buys Intel, it would have first-party foundries of its own. While Qualcomm probably wouldn't withdraw all the chip orders it has already contracted with TSMC for, it would probably begin to manufacture more of its own chips in-house. Other mobile chipmakers might also choose to outsource some production to Qualcomm instead of TSMC. In short, if Qualcomm acquires Intel and then expands the foundries it gains in that deal, TSMC could lose a significant percentage of its smartphone-related revenue.
NASDAQ: QCOM
Key Data Points
A Qualcomm-Intel combo could sap TSMC's automotive and IoT chip businesses
Qualcomm still generated 77% of its chipmaking revenue from smartphone chips in the first nine months of its fiscal 2024 (a period that ended on June 30). But that market is saturated, slowing down, and highly cyclical. So, to reduce its dependence on smartphone sales, Qualcomm has been increasing its focus on automotive and Internet of Things (IoT) chips. Those accounted for 8% and 15% of its revenues, respectively, in the first nine months of fiscal 2024.
In the second quarter of 2024, TSMC generated 5% and 6% of its revenues, respectively, from the automotive and IoT markets. If Qualcomm buys Intel and shifts its automotive and IoT chip production to its own foundries, it could impact TSMC's growth in those markets, as other fabless automotive and IoT chipmakers in the U.S. could also shift orders to Qualcomm.
But should TSMC investors worry about Qualcomm and Intel?
Intel's recent series of blunders indicate it's failing to catch up to TSMC in the "process race" to produce smaller, denser, and more power-efficient chips. And in its weakened state, it's becoming a tempting prize for bigger chipmakers like Qualcomm.
However, TSMC's investors shouldn't fret too much about a potential takeover yet. Antitrust regulators previously barred Broadcom from buying Qualcomm during the Trump administration, citing national security concerns, and blocked Nvidia from acquiring Arm during the Biden administration over antitrust concerns. They would likely block any attempt by Qualcomm to buy Intel for similar reasons.
There's also a chance Intel will sell itself in pieces. In that case, it would be smarter for Qualcomm to acquire Intel's x86 chip designs and patents instead of taking over its capital-intensive foundry business. The foundry unit might be a better takeover target for TSMC, Samsung, or GlobalFoundries -- companies that have experience in that arena -- instead of a fabless chipmaker.
For now, TSMC shareholders should recognize the potential impact of Qualcomm's rumored interest in Intel -- but they shouldn't overreact, nor assume such a merger will happen. It could simply be a lot of sound and fury that, in the end, signifies nothing.
