Will Intel Corporation (INTC.US) really be acquired? JP Morgan deeply analyzes the key factors behind the acquisition rumors.

Recently, there have been reports that Intel Corporation (INTC.US) may become a target for acquisition. Morgan Stanley explored Intel Corporation's potential strategic direction in its latest research report, especially in the context of the incoming new U.S. government. Currently, Intel Corporation's credit rating is neutral, with Moody's Corporation rating it as Baa1 with a negative outlook, Standard & Poor's rating it as BBB with a stable outlook, and Fitch rating it as BBB+ with a stable outlook. These ratings are all at the corporate level. Intel Corporation Could Become a Full Acquisition Target In early January, the technology news website SemiAccurate reported that some companies are considering a full acquisition of Intel Corporation, rather than just acquiring certain business segments. The website claimed that its sources confirmed this intention to acquire Intel. SemiAccurate, founded by Charlie Demerjian, focuses on semiconductor, hardware, and network security news. The website accurately predicted Intel Corporation's issues with the 10-nanometer process in 2016, but also incorrectly predicted that Intel would completely abandon the 10-nanometer process. Additionally, SemiAccurate predicted in 2013 that Apple Inc. (AAPL.US) would transition to ARM-based processors by mid-2013, a shift that didn't actually occur until June 2020. Despite this, Morgan Stanley considers SemiAccurate a reliable source of information, although its reports on Intel have been mixed. In fact, Intel Corporation being an acquisition target is not surprising. The company's stock price fell 57% last year, its CEO suddenly resigned, its ratings have been downgraded multiple times, and it is currently undergoing a significant business transformation to become a leading chip design and manufacturing company. Additionally, the possibility of Intel Corporation splitting its business has long been a topic of discussion in the market. Intel Corporation has openly stated that it is looking for buyers for non-core assets such as Altera, and announced this week that it will separate its VCam business, while further legally separating its foundry department. Intel Corporation's Co-CEO Zinsner stated last month that the question of whether to split in the future is still "under discussion." Morgan Stanley believes that due to the capital intensity and execution risks of the 18A process, separating the IFS (Intel Corporation Foundry Services) department alone would be challenging. However, making significant equity investments with large-scale customers or forming partnerships with foundry peers could be an early opportunity for future action. Potential Buyers of Intel Corporation's Business In September 2024, reports surfaced that Qualcomm had approached Intel Corporation for friendly acquisition discussions, although reports in November indicated that Qualcomm's interest had cooled. Among potential acquirers, Qualcomm (QCOM.US) is a possible candidate. Intel Corporation could help Qualcomm diversify its business in the context of its main customer Apple Inc. gradually transitioning to in-house chip designs. However, Qualcomm's CEO has stated that they have not found any large-scale acquisitions necessary for their revenue goals at the moment, although the company remains open to opportunities. Additionally, Broadcom Inc. (AVGO.US) is a frequent player in the semiconductor industry mergers and acquisitions, but as of September 2024, there has been no evaluation of a possible bid to acquire Intel Corporation. Furthermore, there have been reports that U.S. government officials and GFS (GFS.US) recently met to discuss the possibility of cooperation between Intel Corporation and GFS. While acquiring Intel Corporation's foundry department may face funding challenges, GFS, as a U.S. publicly listed company and a "trusted supplier" of the Department of Defense, may have an advantage. However, any acquisition may require additional supporters, stock trading arrangements, and approval from the new government. It is worth mentioning that Morgan Stanley has been asked multiple times about the possibility of Elon Musk acquiring all or part of Intel Corporation's business through his companies (such as Tesla, Inc. (TSLA.US), xAI, or SpaceX). Despite many uncertainties, considering the financial strength of Musk's companies (with SpaceX valued at $350 billion, Tesla, Inc. valued at $1.3 trillion with net cash of $20 billion, and xAI valued at $50 billion), Morgan Stanley believes that any deal involving the wealthiest individual in the U.S. could improve Intel Corporation's credit status. Importance of Intel Corporation to the U.S. Government Concerns about the "Chip Act" have recently garnered market attention, but with Speaker of the House Mike Johnson retracting his comments about abolishing the act, and Secretary of Commerce nominee Howard Lutnick committing to the project, these concerns have been eased. Morgan Stanley expects Intel Corporation, domestic chip manufacturing, or the "Chip Act" to be mentioned in the incoming president's inaugural address, and the new government's focus on domestic manufacturing and supply chain security is expected to increase. Intel Corporation's "Chip Act" funding includes a significant milestone funding of $7.86 billion, a 25% investment tax credit, and...The Ministry of Defense has allocated 3 billion US dollars for the Safe Area Project.Some of the provisions in these funds revolve around the establishment of change control provisions for IFS (Intel Corporation's foundry services), which further reinforces JPMorgan's view: the US government will ensure that any Intel Corporation business divestiture or asset sale will not weaken the financial position of the foundry sector. Conclusion and Outlook JPMorgan believes that the rumors of Intel Corporation's acquisition remind investors of the challenges in credit analysis and recommendations for Intel Corporation, which need to strike a balance between fundamentals (which may be improving) and potential strategic actions. 2025 will be a decisive year for Intel Corporation's foundry plan, with its 18A process node being widely applied to products designed by Intel Corporation. In addition, Intel Corporation's traditional PC chip design business is expected to benefit from the long-awaited PC refresh cycle, but also faces competition from other designers. While S&P and Fitch currently have a stable outlook for Intel Corporation, Moody's may downgrade its rating to the mid-BBB range in the coming months. From a strategic perspective, rumors surrounding potential large-scale mergers have further strengthened Intel Corporation's public plans to monetize at least part of its stake in Altera (according to Bloomberg's mid-December report, Altera's assets are estimated at $9-12 billion). Overall, JPMorgan believes that Intel Corporation's strategic potential and government further support for its manufacturing plans may offset fundamental pressure in the coming months. While Intel Corporation may still face ongoing headline risks, JPMorgan sees no reason to change its positive view on Intel Corporation's foundry joint venture (Foundry JV). JPMorgan believes that the strategic importance of the foundry sector and the contractual protections related to the FABSJV notes make it more attractive. If S&P successfully approves the agreement (expected to end today) and achieves ratings equalization, JPMorgan expects the spread between Intel Corporation and the foundry joint venture to further narrow, with a fair spread of around 15 basis points in the future, rather than the current 35 to 40 basis points.