CLSA's Srini Pajjuri made a fairly bold claim that a "Plan B" for Intel (NASDAQ:INTC) would be to simply buy MediaTek, a very popular vendor of low-cost system-on-chip solutions for the mass-market smartphone and tablet markets.
The argument is that by buying MediaTek, Intel would have an instant "in" at a number of key handset vendors. Over time, Intel could swap out the off-the-shelf ARM (NASDAQ:ARMH) IP with its own processor cores. This is an interesting thought, but it is unlikely -- and incredibly unnecessary -- for several reasons.
Intel can do turnkey solutions...
MediaTek's primary claim to fame is that it takes off-the-shelf ARM/Imagination Technologies IP and develops an entire turnkey solution from which the smartphone vendor can build. In particular, the focus for these players turns away from trying to get the internals of the phone right to instead focus on the physical design of the handset as well as the software on top of it. It's certainly a good business model.
However, Intel has been doing the same thing. In fact, many of the phones out there based on Intel's "Medfield" system-on-chip were simply branded versions of Intel's Form Factor Reference Design, or FFRD. This is precisely the same strategy that MediaTek has been pursuing, so it's not as though Intel doesn't get it and/or doesn't have the capability to do that in-house, as the CLSA analyst seemed to imply.
But that hasn't been the problem
The way this Fool sees it, Intel's smartphone strategy hasn't really gotten off the ground because it lacks competitive products in this space. These products are coming, beginning with 22-nanometer "Merrifield" and extending with the 14-nanometer products near the end of 2014 and into early 2015. So, that issue should subside. However, even with a competitive applications processor, Intel still needs to push harder to get out modems that are competitive with what Qualcomm (NASDAQ:QCOM) is putting out -- and they also need to be integrated onto the same piece of silicon as the apps processor.
Intel will eventually get there -- its next-generation XMM 7260 discrete modem looks to be quite competitive, and it is likely that the next generation modem (early 2015 timeframe) will be integrated onto the same die as the apps processor. Once Intel is able to do this level of integration -- where Qualcomm leads and MediaTek is gaining more experience -- both the low and the high ends of the smartphone market become wide open to the company.
Buying MediaTek does nothing but waste shareholder dollars
As of the time of writing, MediaTek's market capitalization is in the range of $20 billion. It is likely that Intel, if it were to try to acquire the company, would have to pay a substantial premium to this, suggesting a price tag of about $25 billion to $30 billion. Given that Intel currently has a cash position of $19 billion and a debt position of $13.7 billion, this would probably wreck Intel's balance sheet.
Intel has been able to successfully develop a best-in-class, low-power core. With its expertise in semiconductor manufacturing, as well as the recent successes that it has had with its Bay Trail system-on-chip -- which should only get better over time -- there is nothing that MediaTek has that Intel doesn't already have.
In fact, MediaTek simply licenses off-the-shelf IP while Intel goes the extra mile to create custom-tailored IP and surrounding software ecosystem from compilers to code profilers. Does CLSA really believe that Intel can dominate the rest of the computing market on its own but can't eventually build cell phone chips?
Foolish bottom line
It takes time to build a new line of products, and it takes even more time to actually become a well-respected player. The progress Intel has made in tablets is verification that the company can build the right products.
Given that many of the Asian smartphone/tablet vendors that MediaTek supplies are also Intel customers on the PC side of things, there is no reason to believe that Intel can't build the necessary vendor relationships that it needs over time. Certainly, it can do so for much more than the steep price tag that MediaTek carries.
Ashraf Eassa owns shares of Intel. The Motley Fool recommends Amazon.com, Apple, Facebook, Google, Intel, and LinkedIn. The Motley Fool owns shares of Amazon.com, Apple, Facebook, Google, Intel, LinkedIn, and Qualcomm. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.