Apple (NASDAQ: AAPL) appears to be in advanced negotiations with Intel (NASDAQ: INTC) to acquire Intel's smartphone modem chip business, according to a report in The Wall Street Journal. The deal, which could be completed as early as next week -- assuming the discussions don't break down -- could include a range of patents and employees valued at $1 billion or higher.
An acquisition of this size is no more than a "rounding error" for the companies involved, according to the report, but could have important strategic implications for Apple and its ability to improve the user experience.
Image source: Getty Images.
Truly a win-win
A deal of this magnitude could ultimately be a win-win for both Intel and Apple.
For its part, Intel would be able to unload a business that has long been a money-losing operation. The report cited "a person familiar" with the unit as saying the operation was losing about $1 billion annually, failing to live up to Intel's expectations for the business.
Owning a component that is vital to the operation of its iPhone could be an important step for Apple. The company has moved to develop a number of its own processors in recent years and already makes many of the chips, including ones for iPhones, iPads, Macs, and Apple Watches. The company has long believed that developing custom processors to power its devices results in a better user experience than using off-the-shelf products purchased from other chipmakers. Additionally, by cutting out the middle man, Apple gets to keep more of the profits itself, helping to improve margins in the process. Buying the Intel unit outright could help shave years off Apple's own development efforts.
A long and winding road
It's important to note that Apple and Intel have been down this road before and the talks came up empty. Discussions have been ongoing for more than a year, but broke down after Apple signed a multiyear deal with Intel competitor Qualcomm (NASDAQ: QCOM). The two bitter rivals agreed to a settlement earlier this year as the two companies ended years of legal wrangling over how royalties were calculated regarding technology used on smartphones.
Apple and Qualcomm agreed to settle their dispute just as opening arguments began in the trial between the two. In a joint statement, the companies detailed a six-year license agreement that also included terms for Apple to license Qualcomm's modem chips.
After the settlement was reached earlier this year, Intel announced that it would exit the 5G smartphone modem business, with Intel CEO Bob Swan saying, "It has become apparent that there is no clear path to profitability and positive returns." 5G continues to be an area of "strategic priority" for Intel, but the company wanted to find a way to do so profitably.
It isn't surprising that Apple would reach an accord with Qualcomm -- settling the pending litigation -- then promptly acquire technology that allows the company to produce similar chips for itself.
It ain't over till it's over
It's important to remember that these talks have failed before, so until there's an official announcement, investors should take these reports with a grain of salt.
Apple has long said that it wasn't averse to making deals of this size, as long as they made both strategic and financial sense. The company has made more than 100 acquisitions over the past quarter century, so it certainly isn't beyond the realm of possibility. That said, Apple has only ever made one deal valued at more than $600 million, when it acquired Beats music and electronics for a whopping $3 billion back in 2014. If this deal goes through, it would be the second-largest deal in Apple's history.
Investors will just have to wait and see.
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Danny Vena owns shares of Apple and has the following options: long January 2021 $190 calls on Apple and short January 2021 $195 calls on Apple. The Motley Fool owns shares of and recommends Apple. The Motley Fool owns shares of Intel and Qualcomm and has the following options: short September 2019 $50 calls on Intel, short January 2020 $155 calls on Apple, long January 2020 $150 calls on Apple, short January 2020 $155 calls on Apple, and long January 2020 $150 calls on Apple. The Motley Fool has a disclosure policy.