Intel and Altera: Not Just a Chip Off the Old Block – Wall Street Journal

June 1, 2015 3:11 p.m. ET

It is tempting to see Intel INTC -1.61 % 's acquisition of Altera ALTR 5.79 % as simply the latest in a wave of consolidation in the semiconductor sector. But this deal is a bit different.

After several starts and stops, Intel announced a deal Monday to acquire Altera for $ 54 a share. That came less than a week after Avago Technologies AVGO -0.98 % announced a $ 37 billion bid for Broadcom BRCM -2.44 % , and three months after NXP lined up an $ 11.8 billion deal for Freescale. For both Avago and NXP, the moves represented efforts to diversify their revenue streams even as their respective smartphone segments continue to do well.

In Intel's case, the chip giant is effectively betting $ 16.7 billion—equal to its entire cash pile and then some—on its ability to combine its technology with Altera's to create a new class of chips for use in data centers and the so-called Internet of Things.

It is no coincidence that these two segments represent Intel's best growth prospects at the moment, though the latter one is still too small to move the company's needle by much. It also is no coincidence that Altera remains the most significant customer for Intel's still nascent efforts to make chips for other companies, and that Intel was in danger of losing this business.

That last factor gives this deal a defensive flavor, even if Intel insists otherwise. The potential to combine Altera's flexible technology known as field-programmable gate arrays with Intel's Xeon chips could give Intel even greater share of the rapidly growing data-center business. This segment makes up about one-third of Intel's revenue and is crucial to offset the slowly shrinking market for personal computer chips that is still the company's mainstay.

So it makes sense for Intel to think big here. Yet it is still a risky move. The company's efforts to marry the technologies likely won't yield fruit for a few years at least. Meanwhile, it is paying 42.5 times forward earnings for a company where revenue is projected to fall 9% this year.

And with less than $ 1 billion in net cash at the end of the first quarter, buying Altera puts Intel into a sizable net debt position for the first time since the late 1980s—at least on annual data—according to FactSet. In terms of the risk taken on and ambitions involved, this is anything but just another semiconductor deal.