Did Intel get a bargain?

Mobileye Photo: PR
Dubi Ben-Gedalyahu

Intel's acquisition of Mobileye was one fairly small move in the great global auto-tech game.

The dust from the Mobileye(NYSE: MBLY)-Intel deal is slowly settling. Now that the profits and state tax revenues have all been calculated, the self-congratulations are winding down, and the politicians have finished trying to use the success for their benefit, it is time to assess this deal in its true proportions.

From a local perspective, this is indeed a major step up for Israel's auto-tech companies. It is also clear that the flow of venture capital investments will now become a raging torrent, with the values of the young Israeli companies in the sector soaring sky-high. Similarly, it is a cinch that we will later see several impressive exits from the sector riding the hype of this mega-deal.

A small deal in a huge market

To gain a better perspective, however, it is necessary to look at the broader picture. This is a merger deal between two companies operating in the global semiconductors market. This market, which last year amounted to $350 billion, has been undergoing an accelerating process of mergers and acquisitions of huge financial proportions in recent years. In 2015 alone, mergers and acquisitions in the market topped $100 billion. Activity was just as lively in 2016, so that in terms of this market, the Intel-Mobileye merger was a small-to-medium one.

In order to gain a more focused perspective, it is necessary to look at the specific market on which Intel was training its global sights in the Mobileye acquisition – the market of chips for the auto industry. This category includes, among other things, data processors for engine computers and other electronic auto systems, power management systems, memory components, and the rapidly developing sector of smart car sensors in which Mobileye operates.

Worldwide, revenue from the auto chips sector is currently $40 billion a year, and its annual growth rate is around 6%. This rate is likely to increase as the new vehicles become smarter and more electrified, autonomous, and connected. Current studies estimate that the volume of this market will increase to $50 billion annually within five years.

Most importantly, this is one of the most profitable sectors left in the chip industry, whose profits have greatly shrunk in recent years. The main players in the sector - Intel, Qualcomm, Nvida, and others - are therefore now engaged in an Armageddon over every company that can give them a golden key to the closed and hidebound auto industry.

The sums being tossed around in this worldwide battle are unimaginable. Here is one example: last year, Qualcomm snatched from under Intel's nose Dutch company NXP Semiconductors for $38 billion. One of the most important parts of NXP's dowry, which contributed to the awesome price of this deal, was contracts with five global auto makers with an aggregate production of tens of millions of vehicles to supply a new advanced generation of chips with built-in wireless communications. Among other things, these processors will constitute the electronic backbone for autonomous and electric vehicles.

Nvidia has also spent many years and tens of billions of dollars on development and acquisitions in order to obtain a foothold in the auto chips market. It currently supplies advanced components to manufacturers such as Audi, Tesla, Mercedes, Volvo, and others. Its latest auto chip, the K1, which was designed in advance to provide a basis for advanced driver assistance systems (ADAS), includes visual data processing, real time detection of obstacles, and independent navigation. Those are also Mobileye's areas of expertise.

Intel under pressure

These are only two examples that highlight the competitive pressure to which Intel, the world leader in the auto chips market, is now subject. Several insights can be derived from this state of affairs.

The first is that the asset that Intel is acquiring in the deal is not just Mobileye's technology; it is also, and perhaps in the main, Mobileye's signed contracts to supply components to a long list of manufacturers and models in the present and the future. This is a golden key that will probably enable Intel to supply other chips, such as graphics processors, to manufacturers, and to get in on the ground floor of joint projects for developing future vehicles. Assessments published this week by analysts around the world said that the joint auto business of Intel and Mobileye would generate $10 billion in revenue annually within a few years.

Another piece of the Mobileye acquisition pricing puzzle is an activity that Mobileye has just now begun - the gathering of visual data produced from its sensors installed on millions of vehicles for the purpose of generating up-to-date high-resolution maps of the world's roads. This is a red-hot multi-billion market that is projected to grow at over 10% a year in the coming years. Its "natural" customers are the auto manufacturers, who will have to obtain access to such maps for the self-location and self-navigation of their autonomous vehicles.

In 2015, for example, the four largest auto manufacturers spent an estimated $3 billion on the joint acquisition of Here, Nokia's digital mapping company. In January this year, Intel acquired 15% of this activity for an estimated $500 million, and that was definitely a statement of intent.

This, however, is only part of the story. In addition to the auto industry, all the Internet giants are now investing in attempts to obtain or create up-to-date high-resolution digital maps. This means that companies with unlimited resources, such as Google, Alibaba, and Chinese company Baidu, are also potential customers for Mobileye's mapping product, and also potential buyers for this entire activity, if and when Intel decides to split off this business in a separate IPO.

Finally, in August 2015, a year after Mobileye's massive IPO, and long before the surge in its business, the company's market cap stood at $13.52 billion. In other words, the price of the current deal reflects a premium of only 10% on Mobileye's peak price. From this forward-looking perspective, it can be said that Intel took advantage of a buying opportunity. Maybe it even got a bargain.

Published by Globes [online], Israel Business News - www.globes-online.com - on March 16, 2017

© Copyright of Globes Publisher Itonut (1983) Ltd. 2017

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