Intel’s Possible Merger With GlobalFoundries Is A Smart Deal Here’s Why.


With a reported $30 billion bid for contract chipmaker GlobalFoundries,

Intel

appears to be taking the next big step in its plan to double its manufacturing operations under the leadership of CEO Pat Gelsinger.

Shares of Intel (ticker: INTC) fell 0.2% to $55.70 in Friday afternoon trading, while the benchmark PHLX Semiconductor Index, or Sox, collapsed 0.9%.

Adding GlobalFoundries’ capabilities to Intel would mark an advancement in the company’s plan to become a contract manufacturer. It would bring Intel several new manufacturing plants and a significant customer base with the sales and marketing infrastructure needed to keep the revenue flowing.

Baird analyst Tristan Gerra called the deal a “very attractive value proposition” and said one of the key aspects could be the corporate culture of a foundry company accustomed to serving multiple customers. That’s an area where Intel has no expertise.

In addition, GlobalFoundries has long-term customer agreements that would be both immediately valuable to Intel and increasingly lucrative over time. Intel has advanced manufacturing capabilities that GlobalFoundries, for example, chose not to pursue a few years ago. Customers using GlobalFoundries’ legacy manufacturing technology have the option to upgrade to Intel’s advanced or leading node processor manufacturing techniques, should the need arise.

GlobalFoundries customers have included

Qualcomm

(QCOM) and Intel rival

Advanced Microdevices (AMD).

The deal is unlikely to reshape the semiconductor industry, but it will further expand Intel’s domestic chip manufacturing capacity at a politically favorable time. Congress and the White House have made it clear that they are interested in securing sufficient domestic chip manufacturing capacity, which could mean the deal could sail through any regulatory challenges. The federal semiconductor push includes $50 billion in incentives to boost domestic chip manufacturing and research.

“There’s an understanding that as you become more dependent on two countries — which is basically Taiwan Semi in Taiwan — there’s a risk to your supply chain,” said Max Gokhman, head of asset allocation at Pacific Life Fund Advisors. “Especially given what China may want to do in the long run.”

The talks were reported late Thursday by The Wall Street Journal, but Baird’s Gerra told Barron’s that the two sides have been in talks since at least April, based on the knowledge of its industry contacts of the situation. Thursday’s report, he said, suggests the potential deal is getting more attention from senior executives.

“It doesn’t mean the deal is closed,” he said. “But it certainly means that the negotiations are on a higher level.”

Intel and GlobalFoundries declined to comment.

Because GlobalFoundries is closely monitored, there is little publicly available information about its financial performance. A Barron’s Searching for available data found a single secured loan of $514.5 million taken out by GlobalFoundries. Gokhman said that loan, which was scheduled to be repaid in 2026, did not provide significant leverage for the company.

The lack of financial data makes evaluating the deal difficult. The $30 billion price would be the same as the valuation under an IPO plan, aannounced by its current owner, Global Mubadala Investment, an investment arm of the Government of Abu Dhabi.

With that in mind, Gerra said Intel would probably get a good deal, given that new semiconductor manufacturing plants cost about $10 billion. GlobalFoundries’ website says it operates factories in at least five locations around the world, including three in the U.S.

According to Gerra’s research, GlobalFoundries a 20% profit margin before interest, taxes, depreciation and amortization.

Write to Max A. Cherney at max.cherney@barrons.com

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