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After several months of speculation about whether Intel (INTC) would green light its potential plans to divest Altera -- the developer of Field Programmable Gate Array (FPGA) technology it acquired in 2015 for $16.7 bln -- the chip maker ended the suspense today, cutting a deal to sell 51% of its Altera business to Silver Lake Management for $8.75 bln. The substantial haircut INTC is taking to consummate the deal is a tough pill to swallow, but the transaction will provide some immediate financial relief as new CEO Lip-Bu Tan tries to stop the bleeding in the Foundry business.

Mr. Tan, who took the reins from Pat Gelsinger about one month ago, has discussed the need for INTC to simplify the company's portfolio while prioritizing the company's core chip manufacturing and AI initiatives. Today's news, and INTC's announcement in January to spin-off Intel Capital, are meaningful steps towards streamlining the business and stabilizing cash flows, but there are drawbacks, and the moves don't address the core issue of INTC's weakened competitive position. 

• When INTC acquired Altera, the goal was to integrate Altera's FPGA technology with INTC's Xeon processors to target data centers, IoT, and other high-growth markets. However, the initial effort to combine CPUs and FPGAs into a single package, such as Xeon Gold, failed to gain traction. Furthermore, INTC largely neglected Altera's traditional strength in embedded systems and industrial markets as it focused on data center, opening the door for competitors like Advanced Micro Devices (AMD) and Lattice Semiconductor (LSCC) to take market share.
• Although INTC struggled to properly integrate and capitalize on Altera's technology, FPGAs remain critical for AI and data center applications. Therefore, selling Altera could further weaken the company's position in these markets, adding another layer of difficulty to its turnaround efforts.
• From a financial perspective, Altera contributed $1.54 bln in revenue in FY24, accounting for only about 3% of INTC's total revenue. On a non-GAAP basis, the segment was modestly profitable, generating operating income of $35.0 mln. After being untethered from INTC, Altera's ability to compete as a pure-play FPGA provider in AI-driven markets like edge computing and robotics should be enhanced.
• Meanwhile, INTC could use the capital to shore up its financials after seeing its GAAP EPS plunge to $(4.38) in FY24 from $0.40 in FY23, driven by restructuring charges, inventory write-downs, and steep losses in the floundering Foundry business. In 4Q24 alone, Foundry racked up an operating loss of $13.0 bln as INTC poured billions into new chip factories while it struggled to attract sufficient external customers to help offset the skyrocketing capital expenditures.

INTC’s decision to sell a majority stake in Altera reflects a strategic pivot aimed at financial stabilization and a focus on its core business. While the sale offers immediate financial benefits, it comes at the cost of potentially weakening INTC’s long-term position in key growth areas like AI and data centers.