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Third point CEO Daniel Loeb
David Paul Morris / Bloomberg
After a hard year,
Intel
executives received a surprise in 2020. It came in the form of a letter with clear wording last week from activist investor Daniel Loeb.
Loeb, CEO of hedge fund Third Point, once pointed out the need for change at the chip maker. And it encapsulated the question that many on Wall Street and Silicon Valley have been asking for over a year now: How did Intel (ticker: INTC) lose its way so clearly?
“We can’t understand how the boards that presided over Intel’s decline could have allowed management to destroy the company’s leading market position,” Loeb wrote to Intel President Omar Ishrak. “Stakeholders will no longer tolerate such apparent debt abdications.”
Shares of Intel rose 5 percent following news of Loeb’s letter 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 case for investing around Intel has been that its true value lies in a fully integrated approach to chip manufacturing – designing and producing chips, while competing with Advanced Micro Devices (
I HAVE D
) and
Nvidia
(NVDA) is based on third party manufacturers such as
Taiwan Semiconductor Manufacturing
(TSM) and
Samsung Electronics
(005930. Korea).
But this case meant that Intel could do the same design and manufacturing. Several years of delays have undermined this claim.
“Loss of production lead and other missteps have allowed several semiconductor competitors to capitalize on TSMC, and
SamsungS
take advantage of process technology and gain significant market share at Intel’s expense, ”Loeb wrote.
As Barron’s observed in November, Intel’s problems may be related to a decision about 15 years ago, when it chose not to make processors for
AppleS
IPhone (AAPL). While the mobile market was small at the time, it proved to be a massive volume game for Taiwan Semi and
Samsung,
giving them an increased scale and practice in making advanced, energy-efficient chips.
Read also:Intel has fallen behind rivals and the rest of technology. Why his stock may increase again.
The desire to increase energy efficiency is a major reason why Apple decided to design its own Mac chips, which began to be launched on new models in November. Nowadays, consumers are both focused on long battery life and gross performance, and Intel has failed to keep up. Taiwan Semi is at least a year ahead of Intel in terms of key chip manufacturing technology.
Intel responded to Loeb’s letter with a statement saying it welcomed investors’ input on how to increase shareholder value and that “we look forward to engaging with Third Point LLC on their views on this goal.” “.
The third point declined to comment beyond the letter, but the company was clear about where it sees the issue: “Of particular concern is the issue of Intel’s human capital management and the lack of an articulated plan to address it,” Loeb wrote. .
In June, Jim Keller, a high-class designer, left Intel for personal reasons. Next month, Intel delayed its next generation of chips until the end of 2022 and announced a shake-up in its team of engineers, including the departure of chief engineer Venkata Renduchintala. CEO Bob Swan reorganized the rest of the company’s technology group to report to them.
Swan was not a typical Intel CEO when he was promoted to the top role in January 2019. He comes from a financial background, after serving as eBay’s chief financial officer and partner at investment firm General Atlantic.
The lack of technical expertise is even more evident in Intel’s board of directors, which lacks members with experience in chip manufacturing. Ishrak, who joined the board in 2017 and became president in early 2020, is a long-time executive in medical technology. It is worth asking 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 about the diverse makeup of our board representation,” he told me, “so we have a different mindset in around the table to be able to assess the opportunities and challenges we face. “
Loeb’s letter was vague about the next steps, but the activist noted the possibility of submitting nominations to the board at Intel’s next annual meeting.
Finally, Loeb’s interest aligns with the argument we made in our November story: Intel remains a heavy chipmaker with a considerable core value.
While much of Wall Street would like to see Intel focus exclusively on chip design, it should not become a completely fabless chip operation, such as AMD. The company has already demonstrated flexibility in terms of outsourcing. At the end of 2019, an Intel executive said that “something like 20% to 25% of the volume of wafers we supply comes from outside the company.”
Greater flexibility would help. “Intel could use TSMC material (for example, between 25% and 50% of their needs) to restore the competitiveness of their chips,” New Street Research analyst Pierre Ferragu wrote last week. “This would also create competition for domestic production, which can only do good and help repair Intel’s defective operations.”
Although it’s been a difficult year for Intel, the good news is that it won’t take long for executives to give shareholders hope in 2021 – just the desire to put vanity aside and ask for help.
Write to Max A. Cherney at [email protected]