Will Intel Corporation Buy Qualcomm, Inc.'s Chip Business?

Qualcomm , the world's largest mobile chip maker, is currently mulling a split of its chip-making and patent-licensing businesses. Could Intel , the world's largest maker of PC and server chips, step up and acquire Qualcomm's mobile chip-making unit to become a chip-making superpower?

Several Wall Street analysts believe that it's possible. Cowen and Co. analyst Timothy Arcuri told Reuters that it would be a "chip deal to end all chip deals." Ascendiant Capital Markets analyst Cody Acree stated that a merger would give Intel much-needed "diversity away from PCs." Let's weigh the pros and cons of a potential megamerger and discuss whether or not Qualcomm will split its businesses.

Why a merger might work

If Intel buys Qualcomm's chip-making business, it would instantly dominate the market for mobile application processors and wireless modems. Last year, Qualcomm controlled 51% of the mobile application processor market and 64% of the wireless modem market, according to Strategy Analytics.

ARM Holdings - licensed processor designs, like Qualcomm's, power 95% of smartphones and the majority of tablets worldwide. As for wireless modems, Intel controlled just 1% of the market last year.

To gain ground in mobile devices, Intel has subsidized OEMs with steep discounts on chips, co-marketing agreements, and financial assistance in redesigning logic boards for its chips. Those subsidies, known as " contra revenues ," caused Intel's mobile operating loss to widen from $3.1 billion in 2013 to $4.2 billion last year. Buying Qualcomm's chip-making unit could eliminate the need for such subsidies.

Source: Qualcomm

Qualcomm's chip-making business is highly dependent on orders from the top few smartphone and tablet vendors . Qualcomm is also losing ground to smaller Asian rivals like MediaTekand Rockchip , which sell ARM-based mobile chips at lower prices. As a result, Qualcomm's chip-making revenue fell 22% annually last quarter and the unit's earnings before taxes plunged 74%.

The estimated value of Qualcomm's chip-making business is $30 billion to $40 billion. That's a hefty price tag for a business that's heavily dependent on two main customers, losing ground to cheaper rivals, and posting top- and bottom-line declines. It would also be Intel's largest acquisition ever, dwarfing its $16.7 billion acquisition of Altera .

Will a split even happen?

These pro and con arguments are meaningless if Qualcomm never splits up. The main problem is that Qualcomm's chip-making business is much less profitable than its patent-licensing one. The licensing business generated just a third of Qualcomm's revenue last quarter, but it raked in 85% of its segment profit.

By contrast, the chip-making business, which generated the remaining two-thirds of its revenue, only accounted for 15% of segment profit. As a result, Qualcomm supports R&D at its chip-making unit with patent-licensing profits.

Drexel Hamilton analyst Richard Whittington told Reuters that he couldn't see how Qualcomm could "possibly segregate the two" units and that short-term gains through a sale would be offset by "a permanent loss of market share" in mobile devices, especially after more of its wireless patents expire. Whittington suggested that Qualcomm should partner with Intel or smaller Asian companies instead of splitting its business in two.

The verdict

I believe that the idea of Intel evolving into a chip-making superpower by absorbing Qualcomm's chip-making unit is wishful thinking. First, it's doubtful that a split will even occur, despite recent activist pressure from Jana Partners. Even if Intel were to buy the business after a split, it would expose itself to the fierce competition that is eating up Qualcomm's revenue, profit, and market share.

The $18 million fortune about to be ripped from your credit card

Bad news for your credit card company. The plastic in your wallet may soon be gone forever. And once it is, it could cost major credit card companies as much as $18 million a day! Good news for you. Because when you're finally able to say "goodbye" to the cards stuck in your wallet, a little-known tech company responsible for finally putting an end to plastic could hand its investors life-changing profits. A revealing investor alert from The Motley Fool has the full story. Click here to get it now .

The article Will Intel Corporation Buy Qualcomm, Inc.'s Chip Business? originally appeared on

Leo Sun has no position in any stocks mentioned. The Motley Fool recommends Intel and Qualcomm. The Motley Fool owns shares of Intel and Qualcomm. Try any of our Foolish newsletter services free for 30 days . We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy .

Copyright © 1995 - 2015 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

In This Story


Other Topics


Latest Markets Videos

The Motley Fool

Founded in 1993 in Alexandria, VA., by brothers David and Tom Gardner, The Motley Fool is a multimedia financial-services company dedicated to building the world's greatest investment community. Reaching millions of people each month through its website, books, newspaper column, radio show, television appearances, and subscription newsletter services, The Motley Fool champions shareholder values and advocates tirelessly for the individual investor. The company's name was taken from Shakespeare, whose wise fools both instructed and amused, and could speak the truth to the king -- without getting their heads lopped off.

Learn More