The Pros & Cons to Qualcomm Acquiring Intel

Authors: Michelle Leyden Li and Liat Ben-Zur

September 26, 2024

Note from Michelle: this article was originally published on September 26, 2024 on Medium. Since then, the interest in Intel and it's future has intensified, so I am reposting it here on my blog because I believe the analysis Liat and I present still apply in the current environment.

The tech industry is abuzz this week with a persistent rumor that Qualcomm has approached Intel with a takeover offer. Although the successful merger of these two iconic companies could have a transformative impact on the industry, there are considerable challenges that would need to be overcome. Here’s a look at the potential pros and cons.

Pros of Qualcomm Acquiring Intel

1.Manufacturing Capabilities

• In-House Fabrication: Qualcomm, traditionally a fabless company relying on external foundries like TSMC and Samsung, would gain Intel’s extensive semiconductor fabrication facilities. Vertical integration could significantly reduce Qualcomm’s supply chain vulnerabilities and reliance on third-party manufacturers.

• Supply Chain Flexibility: Owning fabs could provide Qualcomm with greater flexibility within the supply chain ecosystem by controlling production timelines, capacity planning, and process technology roadmaps, enhancing its ability to meet market demands more swiftly.

2. Engineering Synergies

• Complementary Design Expertise: Qualcomm’s leadership in mobile SoC design which includes customized ARM cores and wireless technologies like its flagship CDMA technology, complements Intel’s strengths in high-performance x86 computing architecture FPGAs, programmable devices and data center solutions.

• Innovation Acceleration: Combined R&D efforts could accelerate advancements in areas like 5G, artificial intelligence, edge computing, Internet of Things (IoT), silicon photonics and quantum computing.

• Patents and IP Powerhouse: Access to Intel’s extensive patent portfolio (>200,000 global patents) might provide valuable assets for innovation particularly when coupled with Qualcomm’s own extensive patent portfolio (>300,000 global patents).

• Data Center Expertise: Intel’s strength in servers could help Qualcomm expand its edge computing and AI efforts into enterprise environments.

• Expanded Software Ecosystem: Intel’s software tools and libraries might aid in optimizing Qualcomm’s hardware for a broader range of applications.

3. Market Expansion Opportunities

• Broader Market Reach: Qualcomm has been pursuing the PC market with its recent introduction of the Snapdragon X series. It is also aiming to extend its mobile AI capabilities into HPC and data centers but faces extreme competition from established players including Nvidia, AMD and Intel. Intel’s Xeon processors power a significant portion of global data centers, benefiting from strong relationships with enterprise customers. This has allowed Intel a strong hold in the server market and allowed it to drive it’s integrated AI accelerators as a data center standard. Intel’s deep-rooted presence would give Qualcomm the ability to gain immediate entrance to a market that otherwise is difficult for new entrants to penetrate. In the automotive space, Intel’s Mobileye partnerships with automakers could help open more doors for Qualcomm’s automotive infotainment, connectivity, and ADAS platforms.

• Stronger Competitive Position: A unified Qualcomm-Intel entity would be better positioned to compete against industry rivals like AMD, NVIDIA, Samsung, and emerging players in the semiconductor space, particularly as Qualcomm aims to extend its mobile AI capabilities into HPC and data center environments.

4. Economies of Scale

• Cost Efficiency: The combined operations could and must lead to reduced costs through economies of scale in procurement, manufacturing, and distribution. Cost efficiencies should be a precondition to any takeover discussion.

• Resource Optimization: Shared resources and facilities could optimize production efficiency and resource allocation. As with cost efficiency, resource optimization should be a precondition to any takeover discussion.

Cons of Qualcomm Acquiring Intel

1. Cultural and Leadership Misalignment

2. Differing Corporate Cultures: Qualcomm’s agile and collaborative culture contrasts with Intel’s more traditional and hierarchical structure. This disparity could lead to internal conflicts and slow decision-making.

3. Integration Challenges: Merging two large organizations poses risks of talent loss, decreased employee morale, and operational inefficiencies during the transition period.

2. Engineering and Technological Hurdles

• Architectural Differences: Integrating Qualcomm’s ARM-based designs with Intel’s x86 architecture is likely to present significant technical challenges and complicate product roadmaps. Qualcomm could separate the architectures based on applications and markets to avoid competing architectures for the same product line. For example, Qualcomm’s current Snapdragon portfolio could remain ARM based but it could keep the Intel Xeon server product line x86 based. Another option would be to sell or license x86 IP. Qualcomm could add x86 to its licensing business and license to anyone (and use x86 itself where it makes sense, for example, for server products).

• Process Node Lag and Manufacturing Challenges: Intel has faced delays in advancing its process technologies, trailing behind TSMC and Samsung. Qualcomm relies on these leading-edge nodes for many of its products and Intel’s lag could hinder Qualcomm’s competitive edge. Qualcomm’s cutting-edge chips require the most advanced nodes for optimal performance and power efficiency. Upgrading Intel’s fabs to match competitors would require time and substantial capital expenditure. That being said, as Ed Sperling points out in his recent article for Semiconductor Engineering, “semiconductor manufacturing advances are no longer tied to the process node alone.” Specialty process recipes, new interconnect technologies and innovative packaging and stacking options are critical to the next wave of innovation particularly in AI and HPC. Although Intel has fallen behind in the nanometer race, it is still a leader in advanced packaging and interconnects. Qualcomm could leverage this capability for roadmap leadership.

• Fab Architecture Differences: Qualcomm’s chips are designed for fabrication on TSMC’s or Samsung’s processes. Porting and adapting Qualcomm’s designs to Intel’s fabs would require redesign, customer requalification and design in optimization, a time-consuming and costly exercise. Qualcomm could employ a hybrid model, using Intel’s fabs for certain products while continuing to work with TSMC and Samsung for others.

3. Financial Risks

• Enormous Acquisition Cost: The financial burden of acquiring Intel would be substantial, potentially requiring significant debt financing or dilution of Qualcomm’s equity.

• Enormous Carrying Cost: Fabs are notoriously costly, not just to build but also to maintain. Owning an under-utilized fab is a great way to lose a lot of money. Qualcomm would have to have a high degree of certainty in its ability to manage and fully utilize Intel’s existing and committed fabrication facilities for the acquisition to be viable.

• Return on Investment: The high cost may not justify the uncertainty of potential future benefits, especially if integration challenges impede the realization of synergies.

• Opportunity Cost: Diverting resources to improve Intel’s manufacturing capabilities might detract from Qualcomm’s core competencies and strategic initiatives. Intel has announced investments in new fabs and technologies (e.g., Intel 4, Intel 3, and Intel 20A nodes). However, these are future prospects with inherent risks and uncertainties.

4. Regulatory Scrutiny and Antitrust Concerns

• Global Regulatory Hurdles: Such a merger would attract intense scrutiny from regulators in the U.S., EU, China, and other jurisdictions concerned about market monopolization and national security.

• Potential Deal Blockage: Regulators might block the deal or impose stringent conditions that could negate the merger’s advantages.

5. Operational Redundancies and Market Overlaps

• Product Line Overlaps: Overlapping products and services may require restructuring, leading to layoffs and disruption of ongoing projects. No need for Intel’s Wireless Solutions Group, or any of their cellular efforts and R&D. ADAS overlap in automotive with Mobileye and automotive SoCs. Massive overlap with IoT chips at QCOM and the IoT Group at Intel. R&D, Sales, Marketing and Supply chain management as well as customer support, real estate, and IT.

• Customer Relationship Strain: Existing customers might view the merger negatively if it leads to conflicts of interest or reduced focus on specific market segments.

• Opportunity Cost: Diverting resources to improve Intel’s manufacturing capabilities might detract from Qualcomm’s core competencies and strategic initiatives. Intel has announced investments in new fabs and technologies (e.g., Intel 4, Intel 3, and Intel 20A nodes). However, these are future prospects with inherent risks and uncertainties.

6. Strategic Misalignment in End Markets

• Foundry Services Ambitions: Intel’s plans to offer foundry services to third parties could conflict with Qualcomm’s existing relationships with other foundries which could cause tremendous strain on Qualcomm’s ability to execute on its existing roadmaps and customer commitments.

Final Thoughts

Acquiring Intel could provide Qualcomm with certain advantages, but significant challenges and risks accompany those potential benefits. Intel’s current struggles in 5G, AI, and advanced fabrication processes mean that Qualcomm might not gain the acceleration in innovation it seeks through this acquisition.

Access to Intel’s fabs could be beneficial for vertical integration and would allow Qualcomm to have a level of control over the semiconductor supply chain unrivaled in the industry. That said, the. lag in advanced process technology and the challenges inherent in adapting Qualcomm designs to Intel’s processes may limit the practical use of these facilities for Qualcomm’s cutting-edge chips.

Additionally, the foundry business is a question mark. Qualcomm could choose to keep the foundry business as a separate P&L, becoming its own customer for Qualcomm chip fabrication and offering excess capacity to other fabless semiconductor companies. However, Qualcomm faces the same challenges Intel has faced, namely balancing internal manufacturing and capacity needs with building a standalone foundry business model and getting other fabless chip designers to trust Qualcomm as a supplier. Qualcomm already faces this trust issue in its CDMA licensing business.

All things considered, Qualcomm may find greater strategic value in investing in its own strengths and pursuing targeted acquisitions or forming strategic partnerships that align more closely with its goals and core competencies. Likewise, Intel may find more value for his shareholders and employees by pursuing a different strategic option path. For example, it could create more value by spinning off its manufacturing operations by merging with a company that already understands foundry operations and whose product lines complement Intel manufacturing, packaging and test capabilities such as Globalfoundries.

Whatever the outcome of these discussions, if the rumors are to be believed, it will be interesting to those of us on the sidelines to watch what happens over the coming weeks and months.