In January of the coming year, Intel management promised to announce which products in 2023 will be released by third-party companies. The need for more serious changes is recognized by some of Intel’s institutional investors who have suggested that the company’s management consider “strategic alternatives.” This immediately triggered an increase in Intel shares by more than 5%.
The first about this initiative of the investment fund Third Point, which has so far managed to acquire Intel shares in the amount of about $ 1 billion, was reported by Reuters, but later the existence of an “investment ultimatum” was confirmed by Bloomberg, and a short statement appeared on the Intel website expressing the company’s readiness to study proposals of activists.
According to representatives of Third Point, over the past five years, Intel has significantly weakened its position in the market, and the loss of capitalization this year alone exceeded $ 60 billion. The remuneration of Intel management during this period did not decrease, which further irritates activists. The head of the Third Point fund, Daniel Loeb, called on the company’s management to consider a number of strategic alternatives, and in case of resistance, hinted at its readiness to nominate its own nominees to the Intel board of directors at the next meeting of shareholders. For investment front activists, this is a very typical tactic of behavior.
It is not yet clear which of the Third Point proposals will be accepted by the current Intel leadership and which will be rejected. Activists insist that Intel needs to increase its share of outsourced products. If necessary, you can create joint ventures with them, as this will ensure the allocation of sufficient production capacity. Note that in the case of creating alliances with TSMC and Samsung, problems may arise at the level of negotiating the deal with the antimonopoly authorities and the US authorities.
Another Third Point proposal is to attract US processor developers as Intel’s contract customers. For example, according to activists, the same Apple and Microsoft could use the services of not TSMC for the production of their processors, but entrust this to Intel enterprises located in the United States. Recall that so far, all Intel’s efforts to attract customers to contract services have not been crowned with much success, except for the experience of cooperation with Altera, which the corporation eventually absorbed. Attempts to organize the release of LG processors for smartphones at Intel enterprises also did not provide much return.
Even the acquisition of Altera itself, which in 2015 cost Intel $ 16.7 billion, is not considered by Third Point to be the most reasonable investment. They urge Intel to get rid of dubious assets, and to approach the idea of vertical business integration rationally. Industry analysts interviewed by Seeking Alpha express doubt that Intel will decide to completely get rid of its own enterprises, but it is ready to make any compromises, judging by the rhetoric of CEO Robert Swan (Robert Swan). RBC officials said Intel’s joint venture with TSMC or Samsung would cut the corporation’s profit margins by at least 30%. Having in-house manufacturing allowed Intel to keep costs in check, but technological failures in recent years have cast doubt on the continued viability of maintaining a vertically integrated business model.
Activists reproach Intel for its demoralizing impact on valuable engineering personnel, without which it will be problematic to maintain the company’s technological potential. Apparently, this wording is related to the departure from the company of Jim Keller, one of the leading experts in the industry in the development of processor architectures, who helped create more than one generation of successful Apple and AMD processors, and also managed to work at Tesla. The official reason for Keller’s departure from Intel has to do with personal circumstances, but it is generally believed that Jim had a disagreement with the current Intel leadership over the advisability of outsourcing production.
Investors worried and Intel’s weakening position relative to major competitors. In the personal computer and server segment, Intel processors have begun to give way to AMD products, and NVIDIA compute accelerators are replacing Intel’s segmented and small offerings in the artificial intelligence sector.
An additional motivating argument in negotiations with Intel management representatives of the Third Point fund called their readiness to nominate their own nominees to the board of directors at the next meeting of shareholders, if disagreements arise on key positions. So far, Intel representatives have only expressed their intention to consider the proposals of the activists. The latter, by the way, offer Intel to find an investment advisor to search for “strategic alternatives.” All this has already caused the growth of the company’s share price by more than 5%, although since the beginning of June it has been almost continuously declining.
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