In exchange for 9.9% of Intel Corp.’s equity, the US government is investing nearly $9 billion in this company. This represents a unique and unusual intervention by corporate America.
Analysts warn that while the money injection could help Intel to overcome its deeper problems in the foundry sector, it may not be enough.
The funding fails to address the core risks of business
Intel had already been allocated funds under federal legislation supporting semiconductor production. The initial report on the investment was made Friday.
Analysts argue that the amount of capital Intel has raised is not enough to overcome its biggest challenge: finding customers for their advanced manufacturing technologies.
Lip Bu Tan warned Intel last month, if the company could not land large clients, it may be forced to close its contract chipmaking division.
Tan stated that “as we move forward, Intel 14A investment will depend on customer commitments.”
Analysts in the industry echo this concern.
Kinngai Chen, Summit Insights CEO and Reuters reported that Intel needs to lock in sufficient client volumes for its 14A 18A nodes to be viable.
Even billions of dollars in funding from the government cannot ensure success without such commitments.
Another Reuters article stated that Intel’s 18A Process is experiencing yield issues, which raises questions regarding the company’s ability to compete against Taiwan Semiconductor Manufacturing Co., (TSMC), who has maintained a technological and efficiency lead.
Investors’ reactions and concerns about governance
Intel’s shares rose 5.5% on Friday after the announcement. However, they fell 1% once the terms of the agreement were revealed.
Tan has announced significant job reductions and major restructuring initiatives, but the stock price is still up by 23%.
The agreement stipulates that the government won’t take up a seat on the board, but it has agreed to follow the board of Intel in voting for shareholder issues, “with limited exceptions.”
After the deal is completed, Intel will be Intel’s biggest shareholder. The price is 17.5% below Friday’s close.
A five-year warrant allows the government to buy an extra 5% at $20 per share, if Intel’s foundry business ownership falls below 51%.
Some participants in the market see risk associated with this arrangement.
CreditSights’ Andy Li raised concerns over governance, and how government oversight might affect Intel’s ability to prioritize shareholder interests.
Contextes political and strategic
This $8.9 billion investment is on top of the $2.2 billion already granted in grants, making Intel’s total public investment $11.1 billion.
This move comes after Japan’s SoftBank invested $2 billion in capital earlier this week.
The White House presented the agreement as part of the President Donald Trump’s drive to secure critical supply chains and bring manufacturing jobs to the United States.
This is an excellent deal both for America as well as for Intel. Intel’s work in building cutting-edge semiconductors and chip is essential to our future, Trump stated on Friday.
Analysts caution, however, that only financial support will not solve Intel’s operational problems.
The company’s business in foundries remains uncertain without improvements to chip yields or strong customer commitments–even though the US Government becomes the largest shareholder.
The ICD published this post: US Government’s Investment in Intel May Not Be Enough for Turnaround: Here’s Why.
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