A juicy report from the Wall Street Journal claims that Intel (NASDAQ:INTC) is in talks to buy FPGA maker Altera (UNKNOWN:ALTR.DL). No specifics on the deal, such as timing or final purchase price, were given in the report. Intel's shares closed up 6.38% following the Wall Street Journal's report late last week, and Altera shares were up 28.39%.
Let's talk synergies
According to Bernstein Research's Stacy Rasgon, quoted in Bloomberg, this rumored deal makes sense as there are "synergies" between Altera's FPGA business and Intel's data center business. In a nutshell, by having a leading FPGA vendor under the Intel banner, the latter company could grab more content share within the data center.
Indeed, Intel has already announced that it plans to offer custom Xeon server processors with on-package FPGAs to accelerate certain workloads. Having Altera in-house could potentially allow for a broader product portfolio of Xeon-with-FPGA products. It could also make it tougher for competitors in both server processor and FPGA businesses to compete with Intel's tightly integrated CPU/FPGA solutions.
Further, Intel and Altera have already been very public about a foundry relationship that exists between them for high-end FPGAs. If Intel acquired Altera, then it would make sense for Altera to transition all of its products to Intel manufacturing. This could potentially serve as a long-term competitive advantage for Altera relative to longtime rival Xilinx (NASDAQ:XLNX).
For Intel, this could mean more leading-edge semiconductor business for its leading-edge factories, as well as a further diversified revenue base from its traditional PC business.
Will it move the needle for Intel?
Intel, taken as a whole, generates in the vicinity of $55 billion in annual revenue, so tacking on Altera's roughly $2 billion in annual revenue is nice -- but not a game changer. However, if we look at this rumored deal from the perspective of Intel's data-center business, it looks a lot more interesting.
Intel's data-center group generated about $14.4 billion in revenue last year and about $7.3 billion in operating profit. If you add to that Altera's revenue of $1.93 billion last year, as well as its operating profit of $543 million, then this would mean an instant 13.4% boost in annual data-center revenue, and an increase of 7.44% in the segment's operating income.
I'm sure that if such a deal is announced, both Intel and Altera will talk about the "cost synergies" that the two companies expect to eventually realize from the business combination. This might mean an even larger increase to operating profit for Intel over time from this deal.
With Altera, Intel's plan to dominate data centers could be complete
Intel executives have talked about how they want to expand their offerings to span much of the data center. Intel has already made a number of acquisitions to bolster its data-center group, including the Axxia networking processor assets from Avago (NASDAQ:AVGO), and network switches from its Fulcrum Microsystems acquisition.
If Intel were to buy Altera, it would seem to me that it would have the most complete data-center portfolio out there (if it doesn't already). The ability to be a "one stop shop" for many companies' data-center needs could serve as an incredible competitive advantage. With a leading FPGA vendor under the Intel banner, it's hard to imagine that any other company today could successfully challenge Intel's data-center dominance.
Ashraf Eassa owns shares of Intel. The Motley Fool recommends 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.