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Third point leader Daniel Loeb
David Paul Morris / Bloomberg
After a hard year,
Intel
action officials received one surprise by the end of 2020. It came in the form of a letter with sharp words last week from campaign investor Daniel Loeb.
Loeb, Head of hedge fund Third Point, explained the need for change at the once innovative chip maker. And it included the question that many on Wall Street and in Silicon Valley have been asking for over a year now: How did Intel once lose control (ticker: INTC) so clearly ?
“We can’t say how the boards that led Intel’s recession would have allowed regulators to take away the company’s prime market position,” Loeb wrote to Intel Chairman Omar Ishrak. “Stakeholders will no longer accept such responsibilities.”
Intel shares rose 5% on Loeb letter news and a Reuters report that Third Point had a $ 1 billion stake in the company. The stock was still down 17% in 2020, compared to a 51% gain for the PHLX Semiconductor index.
For years, the investment issue around Intel has been that its true value lies in a fully integrated approach to chip making – it designs and manufactures chips, while they Competing with Advanced Micro Devices (
AMD
) and
Nvidia
(NVDA) relies on such third-party manufacturers
Taiwan Semiconductor Manufacturing
(TSM) and
Samsung Electronics
(005930.Korea).
But that case assumed that Intel could do design and manufacturing just as well. Several years of delay have overturned that claim.
“The loss of manufacturing leadership and other messages has allowed a number of competitors to take TSMC halfway and
Samsung‘s
processing technology capability and gaining a large share of the market at Intel’s expense, ”Loeb wrote.
Mar Barron’s observed in November, Intel’s problems may be linked to a decision 15 years ago, when it chose not to make processors
Apple‘s
(AAPL) iPhone. Although the mobile market was small at the time, it has been a big play for Taiwan Semi and
Samsung,
giving them greater scale and usability in making advanced, energy-efficient chips.
Read also:Intel is on Fallen Behind Rivals and the rest of Tech. Why his stock can rise again.
A desire to boost energy efficiency is a key reason why Apple decided to design its own Mac chips, which began rolling out them to new models in November. These days, consumers are focusing so much on long battery life as they have on raw performance, and Intel was unable to keep up. Taiwan Semi is at least a year ahead of Intel on key chip making technology.
Intel responded to Loeb’s letter with a statement stating that it welcomed comments from investors on how they can increase shareholder value, and that “we look forward to engaging with Third Point LLC on their ideas towards that goal. “
Third Point declined to comment outside of its letter, but the company was clear on where it sees the problem: “Intel’s human capital management problem is a particular problem and without it. an arctic plan to deal with it, ”Loeb wrote.
In June, high-end chip designer Jim Keller left Intel announcing personal reasons. The following month, Intel delayed its next-generation chip until the end of 2022 and announced a shake-up in its engineering team, including the departure of chief engineer Venkata Renduchintala. CEO Bob Swan reorganized the rest of the company’s technology group to report to him.
Swan was not the usual CEO of Intel when he was promoted to senior position in January 2019. He comes from a financial background, having previously been chief financial officer at eBay and a partner at eBay. investment company General Atlantic.
The lack of technical knowledge is even more apparent on Intel’s board of directors, which lack members with experience in chip making. Ishrak, who joined the board in 2017 and became chairman in early 2020, is a long-time medical technology operator. It’s worth thinking about how a more focused board could have led the company in recent years.
I asked Swan about the shape of the board in an interview in November: “I couldn’t feel better about the diversity of our board production,” he told me, “ so that we can have a different thinking around the table so that we can evaluate opportunities and the challenges that we need to address. ”
Loeb’s letter was unclear as to the next steps, but the operator noticed the ability to submit board candidates at Intel’s next annual meeting.
Ultimately, Loeb ‘s interest aligns with the argument we made in our November story: Intel is still a heavyweight making chip with a core value.
While much of Wall Street would want Intel to focus solely on chip design, it doesn’t have to be a chip job like AMD. The company has already shown flexibility in outsourcing. At the end of 2019, Intel’s executive group said that “something like 20% to 25% of the amount of wafer we find comes from outside the company.”
More flexibility would help. “Intel could substantially generate TSMC (say for 25% to 50% of their needs) to restore the competitiveness of their chips,” New Street Research analyst Pierre Ferragu wrote last week. “It would also create competition for in-house manufacturing, which can only do good and help repair Intel’s broken work.”
While Intel has had a difficult year, the good news is that it won’t give operators much hope for shareholders in 2021 – just willing to put vanity aside and ask for a little help.
Write to Max A. Cherney at [email protected]