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Third Point CEO Daniel Loeb
David Paul Morris / Bloomberg
After a hard year,
Intel
executives were taken by surprise last 2020. Last week, it presented the form of a letter with sharp words from activist investor Daniel Loeb.
Loeb, CEO of hedge fund Third Point, exposed the need for a change in the previous pioneering chip maker. And it encapsulated the question that many of Wall Street and Silicon Valley had been asking for over a year: how did Intel (ticker: INTC) lose its way so clearly?
“We cannot understand how the boards that presided over Intel’s decline could have allowed management to distort the company’s leading market position,” Loeb wrote to Intel president Omar Ishrak. “Stakeholders will no longer tolerate these apparent abdications of duty.”
Shares of Intel rose 5% on news of Loeb’s letter and a Reuters report that Third Point had a $ 1 billion stake in the company. Shares were still down 17% in 2020, compared to a 51% increase in the PHLX Semiconductor index.
For years, the case for investing around Intel has been that its true value lies in a fully integrated approach to chip manufacturing: it designs and manufactures chips, while competing with Advanced Micro Devices (
AMD
) i
Nvidia
(NVDA) rely on third-party manufacturers, such as
Taiwan semiconductor manufacturing
(TSM) i
Samsung Electronics
(005930. Korea).
But this case meant that Intel could do the design and manufacturing just as well. Several years of delays have undermined this claim.
“The loss of leadership in manufacturing and other erroneous steps have allowed several competitors of semiconductors to take advantage of TSMC and
Samsung‘s
process technology and gain significant market share at the expense of Intel, ”wrote Loeb.
How De Barron observed in November, Intel’s problems may be related to a decision about 15 years ago, when it chose not to make processors
apple‘s
IPhone (AAPL). Although the mobile market was small at the time, it has proven to be a massive volume game for Semi Taiwan and Taiwan.
Samsung,
giving them greater scale and practice in the manufacture of advanced and energy efficient chips.
Also read:Intel has lagged behind rivals and other technology. Why they can increase their stocks again.
The desire to increase energy efficiency is one of the main reasons why Apple decided to design its own Mac chips, which began launching new models in November. Today, consumers are as focused on long battery life as gross performance, and Intel has not been able to keep up. Taiwan Semi has at least a year ahead of Intel in key chip manufacturing technology.
Intel responded to Loeb’s letter with a statement saying it liked investors’ input on how to improve shareholder value and that “we look forward to collaborating with Third Point LLC on their ideas to achieve this goal.”
Third Point declined to comment beyond its letter, but the firm was clear on where it sees the problem: “The problem of Intel’s human capital management and the lack of an articulated plan to address it is particularly worrying. -lo, “Loeb wrote.
In June, senior chip designer Jim Keller left Intel alleging personal reasons. The following month, Intel delayed the next-generation chip until late 2022 and announced a shake-up to its engineering team, including the departure of chief engineer Venkata Renduchintala. CEO Bob Swan reorganized the rest of the company’s technology group to inform him.
Swan was not the typical CEO of Intel when he rose to the top position in January 2019. He comes from a background in finance, having been chief financial officer of eBay and partner at investment firm General Atlantic.
The lack of technical expertise is even more evident on Intel’s board of directors, which has no members with experience in chip manufacturing. Ishrak, who joined the board in 2017 and became president in early 2020, is a longtime medical technology executive. It’s worth wondering how a more chip-focused board could have guided the company in recent years.
I asked Swan about board makeup in a November interview: “I couldn’t feel better with the diversity of our board representation,” he told me, “so we have different thoughts around the table for to be able to evaluate the opportunities and the challenges that we have to face ”.
Loeb’s letter was vague regarding the next steps, but the activist pointed to the possibility of nominating candidates for the board at Intel’s next annual meeting.
Ultimately, Loeb’s interest fits the argument we made in our November story: Intel is still a heavyweight that makes chips with considerable underlying value.
While much of Wall Street would like Intel to focus exclusively on chip design, it shouldn’t become a totally fabless chip operation like AMD. The company has already shown flexibility in outsourcing. In late 2019, an Intel executive said that “between 20% and 25% of the volume of wafers we come from comes from outside the company.”
More flexibility would help. “Intel could materially leverage TSMC (e.g., between 25% and 50% of its needs) in order to restore the competitiveness of its chips,” New Street Research analyst Pierre Ferragu wrote last week. “This would also create competition for in-house manufacturing, which can only do good and help repair Intel’s failed operations.”
While it’s been a difficult year for Intel, the good news is that executives will soon give shareholders hope in 2021, just the willingness to put vanity aside and ask for help.
Write to Max A. Cherney to [email protected]