Altera Investors Expect Intel Deal Could Return: Real M&A

Investors in Altera Corp. are betting talks with Intel Corp. aren’t totally dead.

Usually, when a deal falls apart, the shares of the target company drop. After people familiar with the matter said Altera rejected Intel’s offer of about $54 a share, ending talks, Altera climbed as much as 5.2 percent Thursday. That’s because investors think a deal at that level is attractive, and Altera could be pressured into reconsidering.

At that price, Altera would be valued at about 23 times its earnings before interest, taxes, depreciation and amortization in the past year. That’s more than a 50 percent premium to the median multiple paid in similar deals over the past five years, according to data compiled by Bloomberg.

Altera extended its gains Friday, rising 2.8 percent to $44.52, giving it a market value of about $13.4 billion. Analysts were projecting Altera stock would hit just $37.91 over the next 12 months, before reports emerged on Intel’s interest.

“Altera’s board is in the hot seat and Altera shareholders will likely press them to revisit their lofty expectations on a deal price,” said Sachin Shah, a special situations and merger-arbitrage strategist at New York-based Albert Fried & Co. The board “needs to act quickly before Intel decides to move on to another peer and is no longer interested in Altera.”

Altera Alternatives

Broadcom Corp., valued at $26 billion, could be a possible alternative for Intel, said Chris Rolland of FBR & Co.

“If Altera decides to play this chicken game, Intel could always turn around and go with Broadcom,” Rolland said. “It makes perfect sense. You’re going to move a lot more wafers, you’re going to have entrance into wireless and you’re going to lock up the data center.”

A representative for Altera, based in San Jose, California, declined to comment. Representatives for Intel, based in Santa Clara, California, and Broadcom, based in Irvine, California, didn’t respond to requests for comment.

Intel rose 2.2 percent to $31.93 at the close Friday, giving it a market value of $151 billion.

Unless Altera’s management can convince investors that it has a plan to accelerate growth, the company also risks attracting activist investors seeking changes and a potential rekindling of the deal with Intel, said Doug Freedman, a San Francisco-based analyst at RBC Capital Markets.

‘Big Task’

Altera is on track to increase sales by 3 percent this year. While that’s better than the revenue decline projected for Intel, it’s still a slower rate than most peers, according to data compiled by Bloomberg. Altera’s fourth-quarter sales missed analysts’ estimates.

On a fundamental basis, Altera is worth about $36 -- about 30 percent less than what Intel was offering, according to William Stein of SunTrust Banks Inc. A bid of about $54 a share falls on the high end of the range that he estimated was reasonable when talks between Intel and Altera were first reported in March.

“They should have taken it, if they’re acting in the best interest of any investor with a reasonable time frame,” Stein said in a phone interview. “The stock price is telling you that there’s a consensus expectation that they’ll be pushed back to the table.”

No other company can offer Altera what Intel can because the industry leader has a manufacturing advantage and the best access to computing customers, he said. The two companies also already have a partnership that allows for Altera chips to be made in Intel’s cutting-edge plants.

It’s possible that Avago Technologies Ltd. could get more synergies out of a deal, though other bidders are unlikely to be interested in topping the already high price, said Freedman of RBC.

“The board and existing management is going to be pressured to show how they can drive better than a $50 value,” he said. “That’s a big task.”

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