Deals

Shira Ovide is a Bloomberg Gadfly columnist covering technology. She previously was a reporter for the Wall Street Journal.

Tara Lachapelle is a Bloomberg Gadfly columnist covering deals. She previously wrote an M&A column for Bloomberg News.

Intel's expensive splurge at the car dealership makes sense, but it's also clear that hype for the next generation of automotive technology is getting out of hand.

Intel Corp. said Monday it will acquire Mobileye NV, an Israeli company whose technology helps self-driving cars "see" their surroundings, for $15.3 billion. Intel can afford the acquisition with its cash on hand, but it's still a pricey roll of the dice. After subtracting Mobileye's net cash, the transaction is valued at $14.7 billion, which works out to about 118 times its trailing 12-month Ebitda. That ranks as one of the most expensive acquisitions by a tech company since the dotcom bubble days.

Buying Like It's 1999
Intel is offering Mobileye the industry's third-highest takeover valuation on an Ebitda basis since the start of the century, if you exclude deals smaller than $5 billion:
Source: Bloomberg
Note: Search includes only deals for which there are data -- some targets weren't profitable on an Ebitda basis at the time they were bought and therefore don't have transaction multiples.

Intel does need to take some risks to find its next big thing. It mostly missed out on the chip industry's huge windfall from the smartphone boom, and the company's two major businesses in chips for personal computers and data centers don't have much growth left. The Mobileye purchase also is a rational effort at playing catch-up to fellow chip makers Nvidia Corp. and Qualcomm Inc., which already have placed their bets on the tech-dependent future of the automotive sector.

Vroom
Mobileye has been the most expensive U.S. listed tech stock on a price-to-sales basis
Source: Bloomberg
Note: Analysis includes companies with at least $100 million in trailing 12-month sales.

It's true that cars of the future, whether driverless or manned, will be collecting more data than ever and will need more software and computing brains to make sense of it all. In principle, Intel together with Mobileye will be able to sell automakers on a package of hardware and software they need for these purposes. Intel likes to say cars are becoming data centers on wheels. That PR spin helps Intel sprinkle a speculative market with the pixie dust of the company's hugely profitable existing business in data-center chips.

To the non-tech crowd on Wall Street, a bet of this scale by an industry stalwart such as Intel serves to validate the growth strategy, even if the payoff is years down the road. But it's also a reminder that enthusiasm for self-driving cars is making chip companies go crazy. 

At this point, it's hard to gauge how big a movement autonomous cars will become, nor how it will affect companies that participate in the technology. Mobileye's automotive imaging technology, for example, is being tested by car makers such as BMW, but you can bet the tech superpowers developing driverless cars will cook up the key components on their own, as Google parent company Alphabet Inc. and Uber Technologies Inc. are doing.

The more the tech industry heavyweights rely on self-built components, the more that threatens to cut Mobileye out of the self-driving future -- or at least slash prices for Mobileye components. The self-driving auto unit of Alphabet claims to be pushing down the prices for the imaging technology that maps the surroundings of autonomous cars. That can't be good for Mobileye's ability to maintain its 75 percent gross profit margins. 

Still, investors have dollar signs in their eyes when it comes to self-driving cars, and it's blinding them to reality. The Philadelphia semiconductor index has climbed more than 50 percent in the last year, compared with a 17 percent jump for the S&P 500 over the same period. The rally, which started last summer, mostly reflects investors' belief that index components such as Nvidia will generate huge growth from self-driving cars or other automotive tech developments -- or that those companies will be acquired at big-ticket prices by companies like Intel hungry for car technology.

Chip Mania
Enthusiasm about takeovers and automotive technology has lifted the earnings multiples of computer chip makers far above the broader stock index
Source: Bloomberg

Sure, the brave new automotive world could mint huge winners, just as Qualcomm became one of the world's biggest tech companies thanks to its leadership position in smartphones. But it's still tough to tell who will become the Qualcomm of autonomous driving -- if anyone at all. Tech companies and investors need to take a deep breath before their bets on self-driving cars make them run off the road. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the authors of this story:
Shira Ovide in New York at sovide@bloomberg.net
Tara Lachapelle in New York at tlachapelle@bloomberg.net

To contact the editor responsible for this story:
Beth Williams at bewilliams@bloomberg.net