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Third point CEO Daniel Loeb
David Paul Morris / Bloomberg
After a difficult year,
Intel
executives received a last surprise in 2020. It came in the form of a letter with harsh words last week from activist investor Daniel Loeb.
Loeb, CEO of the hedge fund Third Point, exposed the need for change in the pioneering chip maker. And he summed up the question that many on Wall Street and in Silicon Valley have been asking for over a year: How did the once dominant Intel (ticker: INTC) so clearly lose its way?
“We can’t imagine how the boards that presided over Intel’s decline could have allowed management to squander the company’s leadership position in the market,” wrote Loeb to Intel President Omar Ishrak. “Stakeholders will no longer tolerate such apparent abdications of duty.”
Intel shares rose 5% with news of Loeb’s letter and a report from Reuters that Third Point had a $ 1 billion stake in the company. Shares still fell 17% in 2020, against a 51% gain for the PHLX Semiconductor index.
For years, the investment case around Intel has been that its true value lies in a fully integrated approach to chip making – it designs and manufactures chips, while rivaling Advanced Micro Devices (
OMG
) and
Nvidia
(NVDA) depend on third party manufacturers, such as
Semiconductor manufacturing in Taiwan
(TSM) and
Samsung Electronics
(005930. Korea).
But this case assumed that Intel could design and manufacture just as well. Several years of delays have undermined that claim.
“The loss of manufacturing leadership and other missteps have allowed several semiconductor competitors to leverage TSMC and
Samsungin
processing technology capacity and gain significant market share at the expense of Intel, ”wrote Loeb.
Like Barron’s observed in November, Intel’s problems may be linked to a decision about 15 years ago, when it chose not to make processors for
Applein
(AAPL) iPhone. Although the cell phone market was small at the time, it proved to be a large volume for Taiwan Semi and
Samsung,
giving them greater scale and practice in making advanced, energy-efficient chips.
Read too:Intel lagged behind its rivals and the rest of the technology. Why your stock may increase again.
The desire to increase energy efficiency is one of the main reasons why Apple decided to develop its own Mac chips, which began rolling out in new models in November. Today, consumers are as focused on long battery life as they are on raw performance, and Intel has been unable to keep up. Taiwan Semi is at least a year ahead of Intel in chip-making technology.
Intel responded to Loeb’s letter with a statement saying that it welcomed investor opinions on how to increase shareholder value and that “we look forward to engaging with Third Point LLC in its ideas towards that goal”.
Third Point declined to comment beyond its letter, but the company was clear about where it sees the problem: “Intel’s human capital management problem and the absence of an articulated plan to solve it are of particular concern,” wrote Loeb.
In June, high-profile chip designer Jim Keller left Intel on personal grounds. The following month, Intel delayed its next-generation chip until the end of 2022 and announced a change 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 typical Intel CEO when he was promoted to the top job in January 2019. He comes from a financial background, having served as chief financial officer for eBay and as a partner at investment firm General Atlantic.
The lack of technical knowledge is even more apparent on Intel’s board of directors, which lacks members with experience in chip making. Ishrak, who joined the board in 2017 and became president in early 2020, is a former medical technology executive. It is worth imagining how a more chip-focused board may have guided the company in recent years.
I asked Swan about the composition of the board in an interview in November: “I couldn’t feel better about the diverse composition of the board’s representation,” he told me, “so we have different thoughts around the table to be able to assess the opportunities and challenges that we have to face. “
Loeb’s letter was vague in terms of the next steps, but the activist noted the possibility of sending nominees to the board at Intel’s next annual meeting.
Ultimately, Loeb’s interest aligns with the argument we made in our November story: Intel remains a heavyweight in making chips with considerable underlying value.
While much of Wall Street would like to see Intel focus exclusively on chip design, it does not have to become a totally factory-free chip operation like AMD. The company has already demonstrated flexibility with regard to outsourcing. At the end of 2019, an Intel executive said that “somewhere between 20% to 25% of the wafer volume we supply comes from outside the company”.
More flexibility would help. “Intel could take advantage of TSMC material (say, 25% to 50% of its needs) to restore the competitiveness of its chips,” wrote Pierre Ferragu, an analyst at New Street Research, last week. “It would also create competition for in-house manufacturing, which can only do well and help repair Intel’s disrupted operations.”
While it has been a difficult year for Intel, the good news is that it won’t be long before executives give hope to shareholders in 2021 – just a willingness to put vanity aside and call for help.
Write to Max A. Cherney at [email protected]