Chipmaker Intel Corporation (INTC) should consider acquiring Taiwanese wireless chipmaker MediaTek within the next three years for $27 billion, insists RBC Capital Markets analyst Doug Freedman. Per Freedman, ARM (ARMH) chipmaker MediaTek could enable Intel to ramp up its mobile chip business.
Freedman reckons that the deal would create more shareholder value for Intel by increasing its share of the mobile system-on-a-chip (SoC) market by up to 16%. Intel currently holds a 4% market share in the mobile chips market. It will also be immediately accretive to Intel’s earnings per share and would help curtail the investment losses that the chipmaker has been incurring to grow its mobile and wireless business.
Intel is investing more than $1 billion per quarter to grow its ambitious mobile and communications business. But it has been suffering heavy losses in the process. That’s because its chips are based on x86 architecture that is less energy efficient than ARM designs.
MediaTek, a global fabless semiconductor company has grown rapidly in the last few years by offering its SoCs and reference designs to smaller handset manufacturers in China and other Asian countries, thus enabling them to compete at the entry level. Its product line includes cheap mobile and tablet chipsets, including Bluetooth, WLAN and GPS chips and NFC SoCs. It is currently the world’s second largest supplier of ARM-based processors.
Media reports indicate that both Qualcomm (QCOM) and MediaTek have grown their shares of the baseband market as traditional players such as Texas Instruments (TXN) and Broadcom Corp decided to exit. In a market that has evolved to highly integrated SoCs, Intel continues to see its share falling to the mid-single digits as the legacy business it inherited from Infineon loses relevance.
As per Freedman, given MediaTek's solid market position, its absorption could be a cheap way for Intel to achieve increased market share with minimal risk. Therefore, the acquisition of MediaTek, which currently generates profit and has strong gross margins, would also fuel Intel’s growth.
Intel shares currently hold a Zacks Rank #1 (Strong Buy).