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Intel to pay $1.4bn for Infineon WLS

But does it really need it?

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Comment Intel has embarked on a major shopping spree to counter the pressures on its traditional businesses, which prompted it to issue a results warning at the end of last week. That was swiftly followed by the announcement that it would acquire Infineon‘s wireless arm, as widely expected, for $1.4bn, hard on the heels of the purchase of security software firm McAfee.

While some elements of the proposed McAfee takeover were baffling, the general strategy was clear and necessary – diversifying the product range, increasing software and services elements as opposed to pure silicon, adding new value to that silicon, finding new routes into the wireless and embedded markets where Intel‘s progress has been obstructed remarkably effectively by the ARM- based community.

The planned acquisition of Infineon WLS (Wireless Solutions), which should close in the first quarter of 2011, is the direct opposite of the McAfee deal. At first glance it is more logical. After all, it will increase, at a stroke, the range and scale of Intel‘s activities in the market it most wants to penetrate, mobile devices. Indeed, only last week a report from analysts at IC Insights said that a major purchase of this kind was the best way to fend off the fate of being overtaken by Samsung as the world‘s largest semiconductor maker. But a closer look raises far more questions that it answers, most importantly, why does Intel want Infineon? It may not be for the most obvious reasons – the expansion in cellphones – but for less high profile aspects of the business, such as its connections to its current parent‘s strongholds in the auto and other embedded sectors, and Infineon WLS‘s specialized architectures for security, which could complement McAfee in a major on-chip security strategy.

The price was low – even a "fire sale", some thought – despite Infineon CEO Peter Bauer‘s insistence that there was no urgency to sell and he would hold out for a high price. Unlike its parent, Infineon WLS has been stable and profitable in recent times, but the merger process could still be fraught, especially with the involvement of German takeover and employment laws, the firms‘ very different cultures, and possible manufacturing tie-ins to the larger Infineon. Intel says it will address these risks by keeping WLS as autonomous as possible, though this in itself could dilute some hoped-for economies of scale and product integrations.

The customer base

The price was probably influenced by the likelihood that Intel will lose, over time, several of the major customers for which some commentators thought it acquired WLS. Infineon‘s main product strength is in cellular modem basebands, and in this sector it is currently ranked fifth in revenue terms and fourth in unit shipment share terms, and is estimated to be on track to ship as many as 300 million basebands in 2010. However, it could lose several of its largest customers.

Also, Samsung sees Intel as a key competitive threat in memory and its own growing app processor business. In recent years, Samsung has got far closer to Infineon, at the partial expense of Qualcomm – the San Diego giant will waste no time trying to fill in any gaps left by WLS, as will MediaTek, and they might even hope for Samsung‘s influence over Apple to facilitate that vacant baseband slot in the next iPhone (Samsung provided the app processor for the first three iPhones and codeveloped the A4 which powers the iPhone 4 and iPad. This is closely integrated with the Infineon baseband).

The likelihood of WLS losing out in future iPhones could be increased as Apple will have to use a Qualcomm baseband in the presumed CDMA version, and could find it attractive to tap the San Diego firm for all future models (especially the iPad, where it could use Qualcomm‘s innovative CDMA/UMTS Gobi modem).

The Apple-centric nature of the markets has tended to portray the Intel- WLS deal as, partly, a way for the latter to shore up its relationship with the iPhone maker, but really, even if Intel/WLS keeps that slot, the Infineon contribution to the iPhone is minimal, low margin and easily replaceable in future models. The two chips it supplies, the baseband and quad-band EDGE transceiver, total an estimated $14.02 in a total BOM of $187.51 for the iPhone 4, according to iSuppli, while the slots Intel would really like, the app processor and memory combination (controlled by Samsung) total $52.35.

Unlike Samsung, Nokia might welcome the new ownership of its strategic supplier for 2G and some low end 3G basebands and SoCs. The market leader has been growing closer to Intel at the high end, notably with their Atom oriented MeeGo software platform, and is an increasingly large customer for merchant basebands now it relies only slightly on inhouse or customized designs. It also has a joint development with Infineon focused on gigabit LTE silicon for future devices. However, the sale of its own modem operations to Renesas suggested that Nokia would transfer much of its baseband business to the Japanese partner in future, since it retains a joint venture relationship.

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