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Intel & Its Potentially Game-Changing Deal

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Intel (INTC - Free Report) is in talks to acquire GlobalFoundries for $30 billion, which would make it the chip pioneer's largest acquisition in its more than half-century history. Intel's new CEO, Pat Gelsinger (less than 6 months at the helm), is moving fast to get this business back on track after years of complacency that pushed its operations far below the innovative curve.

Intel brought digital technology a long way over the past 5 decades, from the first commercialized central processing unit (CPU) in 1971 to the most trusted advanced chipmaker in the world. Today, Intel is facing mounting competition in the proliferating chip space. AMD (AMD - Free Report) , the once 'discount' CPU company in business merely to ensure Intel didn't have a monopoly, is now rapidly stealing market share as its semiconductor technology soars past Intel's.

Gelsinger knows he has to move quickly to get the firm's technology and capacity up to snuff if he wants to regain Intel's longstanding reputation as the most trusted integrated device manufacturer (IDM). Buying GlobalFoundries won't improve the firm's technology, but it will immediately increase its manufacturing capacity for internal and 3rd party use. I venture to guess that this deal is partially fueled by the $52 billion bill to boost semiconductor production after passing in the Senate last month. This landmark bill aims to reduce our economy's reliance on foreign chip makers like Taiwan Semi (TSM - Free Report) , which our tech innovators heavily depend on, manufacturing 57% of the world's total semiconductors.

GlobalFoundries no longer works with advanced chips (less than 10-nanometer transistors) as of 2018 because the cost of keeping up with the accelerating innovative curve was just too high, especially as the margin pinching competition escalated. GlobalFoundries is now focused on more mature "trailing-edge" processes, working almost like a commodity business where pricing is the key differentiator. The company has found itself well-positioned to pick up the overboiled chip demand in the automotive space amid this global shortage, which to me seems like one of the primary reasons Intel is picking them up.

This trailing-edge chipmaker is anticipated to bring in around $6 billion in revenue this year, which would value this deal at roughly 5x price to sales, which seems a bit rich for a trailing-edge foundry. I have a feeling that a chunk of that $52 billion semiconductor bill will be paying for this deal.

It is still unclear whether Intel would upgrade these facilities to compete with leading-edge foundries like TSMC and Samsung, or would it just be a play to increase capacity. Pat Gelsinger is yet to prove himself at the helm, so my opinion about INTC remains neutral.

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