Seeking Alpha contributor Esekla pointed out in a recent article that sensor system-on-chip specialist InvenSense (NYSE:INVN) might be a compelling acquisition for either Qualcomm (NASDAQ:QCOM) or Intel (NASDAQ:INTC). In this article, I'll look at whether such a purchase by either chip giant would make long-term strategic sense.
How about Qualcomm?
Qualcomm develops a wide range of processors for mobile devices. For example, iFixit's teardown of the Samsung (NASDAQOTH:SSNLF) Galaxy S5 revealed a number of Qualcomm-designed chips inside of the phone, including:
- Applications processor
- Wireless transceiver
- Audio codec
- Power management IC
It's clear that Qualcomm aims to provide as many chips into the smartphone market as possible. Not only does the company generate higher revenue if it sells more chips into a given phone design, but it further simplifies the lives of its customers by offering even more chips as part of a single platform.
Additionally, Qualcomm has a lot of cash on the balance sheet. Even at a 50% premium to InvenSense's most recent closing price, Qualcomm would only need to shell out just shy of $2 billion to acquire the company -- chump change relative to Qualcomm's approximately $32 billion in cash and marketable securities.
In short: if Qualcomm wants to gain further content share in the smartphone market in order to solidify an already leading position in mobile chips, then picking up InvenSense might be a good way to do so.
What about Intel?
While Esekla suggested in a prior piece that Intel would be an "ideal suitor," the company doesn't really have much of a presence in the mobile chip market today. While some might argue that a degree of mobile exposure (i.e., via InvenSense) might be good, I would disagree.
Intel is fundamentally a computing company that is trying to transform itself into a computing and connectivity company. Until the company can straighten out its mobile processor, connectivity, and baseband stories, it would be unwise to spend additional capital bringing on InvenSense, which offers Intel a negligible increase in revenue and lower-than-corporate-average gross margin.
If, down the line, Intel becomes a major supplier of mobile silicon, then it might make sense to add InvenSense into the mix as a way to gain content share. However, until the fundamentals for mobile are in place -- and I'd argue they aren't yet -- InvenSense would be a poor use of Intel stockholder money.
Does InvenSense need a buyout?
With InvenSense shares trading in the doldrums, many investors would likely welcome a buyout, if only for a "quick" way out of what is probably a losing position. That said, it's not generally a good idea to base an investment strategy on hope, especially for a merger and/or acquisition deal.
At this point, InvenSense appears viable over the long haul as a stand-alone business. Additionally, I think that if the company can prove itself over the next several quarters, then the current stock price might prove a good opportunity for risk-tolerant investors. However, the company needs to avoid mistakes that lead to things like substantial inventory writedowns, and it needs to deliver on its promises of longer-term gross margin expansion.
Put bluntly, the company needs to regain investor trust.
InvenSense is scheduled to present at an investor conference at 2:20 p.m. EDT on Nov. 20. All InvenSense stockholders, as well as potential investors should tune in for a clearer picture of where the company is today and what management believes the future holds.
Ashraf Eassa owns shares of Intel, InvenSense, and Qualcomm. The Motley Fool recommends Intel and InvenSense. The Motley Fool owns shares of Intel, InvenSense, 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.