Hedge fund Third Point urges Intel to explore deal options

Platform Industry: Intel logo on building

Activist hedge fund Third Point LLC is compelling Intel Corp to explore strategic options, such as whether it should keep chip layout and production under one roof, according to a letter it sent to the company’s chairman on Tuesday which has been reviewed by Reuters.

Were it to get traction, Third Point’s push for changes could cause a major shakeup at Intel, which was slow to respond to investor calls to outsource more of its manufacturing ability. It could also lead to the unwinding of some of its acquisitions, such as the $16.7 billion buy of programmable chip manufacturer Altera at 2015.

Third Point Chief Executive Daniel Loeb composed to Intel Chairman Omar Ishrak calling for prompt action to raise the organization’s position as a major supplier of chip chips for PCs and information centers. The New York-based finance has amassed a nearly $1 billion stake in Intel, according to individuals familiar with the matter.

Intel shares rose 6.1% to $49.95, the most in over eight months on the news, providing the company a market value of more than $200 billion. The stock had dropped approximately 21 percent annually, compared with a 43% rise in the Nasdaq Composite Index.

Intel’s most urgent task was addressing its “human capital management issue,” as many of its talented chip designers have fled, “demoralized by the status quo,” Loeb wrote in the letter.

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Intel is also losing market share in its center PC and information center markets to Advanced Micro Devices Inc, Loeb added. NVIDIA Corp is controlling computational models used in artificial intelligence applications, while Intel has been largely absent in this market, according to the letter.

“Without immediate change at Intel, we fear that America’s access to leading-edge semiconductor supply will erode, forcing the US to rely more heavily on a geopolitically unstable East Asia to power everything from PCs to data centers to critical infrastructure and more,” Loeb wrote.

In a short statement, the Santa Clara, California-based firm stated, “Intel welcomes input from all investors regarding enhanced shareholder value.

Loeb asked Intel to retain an investment adviser to evaluate strategic alternatives, such as whether it should remain an integrated device maker and the potential divestment of failed acquisitions, according to the letter. Third Point believes that Intel should think about separating its chip layout from its semiconductor manufacturing plant production operations, according to the sources. This could include a joint venture in manufacturing, according to sources.

Intel clients, for example Apple, Microsoft Corp and Amazon.com, are creating their own in-house silicon solutions and delivering those designs to be manufactured in East Asia, Loeb wrote. He suggested Intel must offer new solutions to keep these clients rather than have them ship their manufacturing off.

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Third Point, which has $15 billion in funds under management, has expertise in pushing businesses to pursue prices, such as at Prudential Plc, Yum! Brands Inc, Dow Chemical and United Technologies. The company’s Third Point Offshore fund was up 19.9% to the year through the middle of December, according to a source familiar with the matter.

Loeb stated in the letter which Third Point allowed the option to submit nominees for election to Intel’s board at its next annual meeting, if it feel “a reluctance to work together to address the concerns” it increased.

OUTSOURCING MANUFACTURING

The COVID-19 pandemic has given Intel a boost in the form or slumping laptop sales, as workers and students work and learn from house. However, the firm has failed to capitalize on strong demand for semiconductors more broadly, had to power everything from smartphones to artificial intelligence.

That is because Intel’s in-house manufacturing capabilities have often fought with the customized processors its own clients want. The ability of its rivals to use a broad network of providers also results in most of its offerings lagging its rivals in speed and energy consumption.

Splitting its own design and manufacturing operations could help it produce better chips at a lower price by tapping outside vendors to produce its most advanced central processors, a measure executives have long resisted.

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But selling Intel’s factories, or even opening them up more to contract manufacturing, could pose a challenge because they’re geared toward its own design process, instead of wider business standards that other companies follow.

US national security concerns could present another obstacle to a potential divestment. Intel’s most powerful manufacturing competitions – TSMC and Samsung – have their manufacturing base overseas, and it’s unclear whether authorities would approve a sale of some of Intel’s chipmaking operations to a foreign thing, given its central role in the supply chain.

Intel called its former chief financial officer, Bob Swan, chief executive last year. In Juneit lost one of its veteran chip designers, Jim Keller, more than a dispute about whether the company should outsource more of its own production, sources said at the moment.

The team at Platform Executive hope you have enjoyed this news article. Initial reporting via our official content partners at Thomson Reuters. Reporting by Svea Herbst-Bayliss in Boston and Stephen Nellis in San Francisco. Editing by Greg Roumeliotis and Jonathan Oatis.

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