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Daniel Loeb, CEO of Third Point
David Paul Morris / Bloomberg
After a difficult year
Intel
Executives received one last surprise in 2020. It came last week in the form of a sharply worded letter from activist investor Daniel Loeb.
Loeb, CEO of hedge fund Third Point, brought the need for change to the once pioneering chipmaker. And he summed up the question many on Wall Street and in Silicon Valley have been asking for over a year now: How did the once-dominant Intel (ticker: INTC) get lost so clearly?
“We cannot comprehend how the boards that foresaw Intel’s demise could have allowed management to devour the company’s leading market position,” Loeb wrote to Intel chairman Omar Ishrak. “Stakeholders no longer tolerate such an apparent waiver of duty.”
Intel shares were up 5% after 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, versus a 51% gain for the PHLX Semiconductor index.
For years, the investment case around Intel has been that its real value lies in a fully integrated approach to chip making – it designs and manufactures chips, while its competitor Advanced Micro Devices (
AMD
) and
Nvidia
(NVDA) rely on third party manufacturers such as
Semiconductor manufacturing in Taiwan
(TSM) and
Samsung Electronics
(005930.Korea).
But that case assumed Intel could design and manufacture equally well. Years of delays have undermined that claim.
“Loss of manufacturing leadership and other missteps have allowed several semiconductor competitors to leverage TSMCs and
Samsung‘s
process technology and gain significant market share at the expense of Intel, ”wrote Loeb.
Such as Barron’s noted in November, Intel’s problems may be related to a decision made some 15 years ago, when it chose not to make processors for
Apple‘s
(AAPL) iPhone. Although the mobile market was small at the time, it has proven to be a huge volume for Taiwan Semi and
Samsung,
allowing them to scale up and practice making advanced, energy-efficient chips.
Also read:Intel has fallen behind rivals and the rest of the technology. Why his stock can rise again.
The desire to increase energy efficiency is a big reason why Apple decided to design its own Mac chips, which were introduced on new models in November. Today’s consumers are as focused on long battery life as they are on raw performance, and Intel hasn’t been able to keep up. Taiwan Semi is at least a year ahead of Intel in key chip-making technology.
Intel responded to Loeb’s letter with a statement saying it welcomed investor input on increasing shareholder value and that “we look forward to talking to Third Point LLC about their ideas for that purpose.”
Third Point declined to comment outside of its letter, but the company was clear on where it sees the problem: “Of particular concern is the problem of Intel’s human capital management and the lack of a clear plan to address it,” Loeb wrote. .
In June, leading chip designer Jim Keller left Intel for personal reasons. The following month, Intel delayed its next-generation chip until the end of 2022, announcing 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 typical Intel CEO when he was promoted to the top role in January 2019. He has a background in finance and served as Chief Financial Officer of eBay and as a 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 making. Iraq, which joined the council in 2017 and became its chairman in early 2020, has been a leader in medical technology for many years. It’s worth wondering how a more chip-focused board would have run the business over the years.
I asked Swan about the composition of the board in an interview in November: “I couldn’t feel any better about the diverse composition of our board representation,” he told me, “so we think differently around the table around the opportunities and the challenges we face. “
Loeb’s letter was vague in terms of next steps, but the activist pointed out the possibility of submitting board nominees at Intel’s next annual meeting.
Ultimately, Loeb’s interest lines up with the argument we made in our November story: Intel remains a heavyweight for making chips with significant underlying assets.
While much of Wall Street would like Intel to focus solely on chip design, it doesn’t have to be a completely fabless chip operation like AMD. The company has already shown flexibility when it comes to outsourcing. In late 2019, an Intel executive said that “about 20% to 25% of the wafer volume we buy comes from outside the company.”
More flexibility would help. “Intel could use TSMC equipment (say 25% to 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 internal manufacturing, which can only do good and help repair Intel’s broken business.”
While it’s been a tough year for Intel, the good news is that executives don’t need much to give shareholders hope in 2021 – just a willingness to put aside vanity and ask for help.
Write to Max A. Cherney at [email protected]