Monday, January 17, 2011

Why Intel must buy ARM

Last week Intel, the largest and most profitable semiconductor manufacturer, announced record sales and profit, but their performance by product segment combined with cataclysmic shifts in both retail and enterprise computing markets foretell Intel's growth to be in serious jeopardy if they do not acquire ARM.

Intel’s legacy PC processor business will never again be a growth engine. Consumers have an insatiable demand for electronics that enhance their experience in social networking, personal communications, portable gaming, electronic media (music, video, books, etc.), shopping, and financial management. In these markets the PC is losing badly to smart phones and tablets where ARM based processors dominate.  The decline in the PC's value (processor speed and data storage) will also be fueled by commercial customers moving their business management solutions to the cloud

The Data Center Group, which provides technology for enterprise servers and cloud computing, is Intel’s only promising growth business and delivered 23% of the top line revenue and 28% of the operating profit last quarter. But industry powerhouses like Nvidia, Marvell, IBM and start-ups like Calxeda (backed by TI, ARM, and the government of Abu Dhabi which also owns two of the largest semiconductor wafer suppliers) are preparing to launch very high performance ARM based products targeted to eclipse Intel in servers. There is little doubt that Intel will attempt to leverage supply and pricing of PC processors to retain server business with companies like Dell and HP, but they will have little sway over cloud computing companies like Google who develop their own server solutions. 

In the past 30 years, Intel has only done one thing well; microprocessors. If they are to maintain their dominance in the microprocessor business and grow shareholder value, they must acquire ARM while they can still afford the valuation. Too bad they have recently inked deals to acquire McAfee for $7.7B (strategically puzzling) and Infineon’s Wireless business for $1.4B (returning to a market where they have repeatedly failed). Capital poorly invested.