Apple’s and Intel’s No-Brainer Deal

Apple is reportedly in ‘advanced talks’ to acquire Intel’s modem-chip business.


Photo:

nicolas asfouri/Agence France-Presse/Getty Images

Some deals need to be sold.

Apple
Inc.


AAPL 0.73%

potentially buying

Intel
Corp.


INTC 0.69%

’s modem chip business isn’t one of them.

The Wall Street Journal reported Monday that the two are in “advanced talks.” A deal would purportedly involve both the intellectual property and staff related to Intel’s effort to design and build the crucial smartphone component that ultimately landed only Apple as a customer. The reported purchase price under discussion is about $1 billion.

That is less than a week’s worth of free cash flow for Apple. It also is about what Intel has been losing annually on modems. Despite landing the sizable iPhone business, Intel’s modem-chip operation never achieved the necessary scale to compete profitably with market leader

Qualcomm
.


QCOM -2.51%

Meanwhile, Apple was effectively locked into the Intel modem during its bruising legal tussle with Qualcomm. The latter’s advancements in 5G technology ultimately spurred a settlement of that dispute, but it is an uneasy peace. Intel now has a modem operation with no customer following this year’s iPhone model, and Apple is back to depending on a supplier with whom it now has a rather tortured history.

So the deal under discussion solves a major strategic problem for both at a price not worth either one bickering over. That still is no guarantee a transaction will get done. With nearly $113 billion of net cash in the bank, Apple has plenty of money, but it doesn’t part with it easily. The company has long eschewed large-scale M&A, with the $3 billion purchase of Beats in 2014 being its only deal above $1 billion. Apple’s acquisition of PA Semi in 2008 that formed the roots of its current chip-design team cost only $278 million.

But buying Intel’s modem operation is still Apple’s best bet at ultimately weaning itself off of Qualcomm. That is more bad news that Qualcomm doesn’t need right now, given the current legal cloud from the Federal Trade Commission case that is currently on appeal.

Granted, Qualcomm currently has a multiyear chip supply agreement in place with Apple now, thanks to the recent settlement. That should limit any near-term damage. And developing a competitive modem would likely take Apple years anyway—if it can do so at all. But Qualcomm’s shares still fell nearly 3% Tuesday anyway, as a deal between Apple and Intel would essentially confirm Apple’s long-suspected intentions of taking the modem chip business in house.

Write to Dan Gallagher at dan.gallagher@wsj.com

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