Digitimes first reported that Intel (NASDAQ:INTC) might be looking to partner up with cellular chipmaker, Spreadtrum. Today, a rumor just surfaced (via Marbridge Daily) that Intel is, instead, looking to take a 20% equity stake in Tsinghua Unigroup, which purchased Spreadtrum a little more than a year ago.
What could Intel want with Spreadtrum? Does this deal make any sense? Let's take a closer look.
Rewinding back to Intel's 2013 investor meeting
Back in Nov. 2013, Intel's Bill Holt took the stage at the company's annual investor meeting to outline Intel's competitive position and its business strategy to best utilize the company's leading-edge chip manufacturing technology. While much of the presentation focused on how Intel's manufacturing prowess would translate into competitive Intel-designed products, Holt also spent some time talking about Intel's potential role as a foundry. In particular, check out the following slide from Holt's presentation:
Notice that the slide indicates that Intel Custom Foundry would make chips for smart phones and entry mobile, but makes a point to not include tablets there? This suggests that Intel might be interested in acting as a foundry for smartphone chip vendors, particularly as the company's own homegrown efforts have seen very little commercial success to date.
Remember how, back in May, Intel announced a deal with Rockchip for the development of low-cost tablet chips, whereby Rockchip would develop chips based on Intel-designed building blocks? Well, those chips will, according to Intel, be built externally; but my guess is that, longer term, Intel expects future designs to be built in-house.
This allows Intel to proliferate its X86 designs, collect some of the design margin, and grab the foundry margin, to boot. Strategically, Intel is hitting ARM Holdings (NASDAQ:ARMH), which won't collect royalties on Intel-based CPU cores, as well as foundry players like Taiwan Semiconductor (NYSE:TSM) and Samsung.
While Intel's CEO recently signaled that Rockchip will likely produce smartphone chips based on Intel core designs, Intel may also be looking to tap Tsinghua/Spreadtrum, which already has a pretty sizable footprint in the low-cost smartphone market, to try to drive significant low-cost smartphone-related volumes. This, like the Rockchip deal, could potentially hurt ARM Holdings and the various foundries, though probably in a larger way, because smartphone volumes are much higher than tablet ones.
Some potential reasons to doubt this deal
That being said, although there are good strategic reasons for Intel to want to pursue such a deal, there are some clues out there that this deal may not materialize. For example, Taiwan Semiconductor recently announced a new variant of its 28-nanometer chip manufacturing node aimed at low-cost chips.
In the press release, a number of companies expressed their happiness with the new node. Among the companies signing the praises of this new process was Spreadtrum. Nevertheless, it's common for fabless chip manufacturers to multi-source, so this may not be worth reading too much into.
Another reason to be suspicious is that Intel is reportedly investing $1.5 billion into Tsinghua Unigroup for a 20% stake. Note that Spreadtrum sold to Tsinghua just last year for $1.78 billion, and this represented a substantial premium to the pre-acquisition trading price. If Intel really wanted to "buy" its way into the smartphone market -- which is what this potential deal could ultimately boil down to -- why didn't it just buy Spreadtrum outright for about this price?
Foolish bottom line
It probably won't be too long now before we know whether it's real and, if it is, what the strategic motivation behind it may be. At this point, there are reasons to like this potential deal; but, at the same time, I'm not completely sold that it's true.
Ashraf Eassa owns shares of ARM Holdings and Intel. The Motley Fool recommends Apple and Intel. The Motley Fool owns shares of Apple and Intel. 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.