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Third Point CEO Daniel Loeb
David Paul Morris / Bloomberg
After a difficult year,
Intel
drivers received one last surprise in 2020. It comes in the form of a sharply worded letter from activist investor Daniel Loeb over the past week.
Loeb, CEO of hedge fund Third Point, outlined the need for change at the once groundbreaking record maker. And he summed up the question that many on Wall Street and in Silicon Valley have been asking for more than a year: How did the once dominant Intel (ticker: INTC) so clearly lose its way?
“We can not see how the boards that led Intel’s decline could allow management to weaken the company’s leading market position,” Loeb wrote to Intel chairman Omar Ishrak. “Stakeholders will no longer tolerate such apparent dereliction of duty.”
Intel shares rose 5% with news of Loeb’s letter and a Reuters report that Third Point has a $ 1 billion stake in the company. The stock fell 17% in 2020, compared to a 51% increase for the PHLX Semiconductor index.
For years, the investment case surrounding Intel was that its true value lay in a fully integrated chip manufacturing approach – it designs and manufactures chips, while competing with Advanced Micro Devices (
AMD
) en
Nvidia
(NVDA) relies on third-party manufacturers such as
Taiwan Semiconductor Manufacturing
(TSM) and
Samsung Electronics
(005930. Korea).
But the case assumed that Intel could design and manufacture equally well. Several years of delays have undermined the claim.
‘The loss of manufacturing leadership and other flaws have enabled several semiconductor competitors to replace TSMCs and
Samsungsay
process technological skills and gain a significant market share at Intel’s expense, ”Loeb wrote.
As Barron’s noticed in November, Intel’s problems may have been linked to a decision about 15 years ago when it decided not to process
appealsay
(AAPL) iPhone. Although the mobile market was small at the time, it had a massive volume for Taiwan Semi and
Samsung,
give them greater scale and practice making advanced, energy efficient chips.
Also read:Intel has fallen behind competitors and the rest of technology. Why the stock may rise again.
A desire to increase energy efficiency is a major reason why Apple decided to design its own Mac chips, which began rolling out to new models in November. Nowadays, consumers are just as focused on long battery life as on raw performance, and Intel could not keep up. Taiwan Semi is Intel at least a year ahead on the most important chip manufacturing technology.
Intel responded to Loeb’s letter with a statement that it welcomes investor input on how to improve shareholder value and that “we look forward to discussing with Third Point LLC their ideas for achieving this. “
Third Point declined to comment further than its letter, but the firm was clear about where it sees the issue: ‘This is particularly Intel’s problem with managing human capital and the absence of a related plan to address it, wrote Loeb.
In June, the highly regarded disc designer Jim Keller left Intel, citing personal reasons. The following month, Intel delayed its next-generation chip until late 2022 and announced a stir in its engineering team, including the departure of chief engineer Venkata Renduchintala. CEO Bob Swan has reorganized the rest of the company’s technology group to report to him.
Swan was not the typical CEO of Intel when he was promoted to the lead role in January 2019. He comes from a financial background, having served as CFO of eBay and as a partner at investment firm General Atlantic.
The lack of technical expertise is even more pronounced in Intel’s board of directors, which does not have members with experience in manufacturing chips. Ishrak, who joined the council in 2017 and became chairman in early 2020, is a longtime manager of medical technology. It is worth wondering how a more disk-oriented board could have led the company in recent years.
I asked Swan about the composition of the board in an interview in November: ‘I could not have felt better about the diverse composition of the representation of our board,’ he told me, ‘so we think differently about the table can judge. opportunities and the challenges we face. ”
Loeb’s letter was vague in terms of the next steps, but the activist noted the possibility of submitting candidates of the board at the next annual meeting of Intel.
Finally, Loeb’s interest is in line with the argument we made in our November story: Intel remains a heavyweight in the production of chips with significant underlying value.
While much of Wall Street wants to see Intel focus exclusively on chip design, it does not have to be a complete factory chip industry like AMD. The company has already shown flexibility when it comes to outsourcing. At the end of 2019, an Intel CEO said that “something like 20% to 25% of the wafer volume we acquire comes from outside the company.”
More flexibility will help. “Intel can significantly leverage 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 will also create competition for internal manufacturing, which can only help well and help repair Intel’s broken operations.”
Although it has been a difficult year for Intel, the good news is that executives will not need much to give shareholders hope in 2021 – just a willingness to put vanity aside and ask for help.
Write to Max A. Cherney by [email protected]