Intel wrote-off $48 million of private company investments in the most recent quarter ending April 1, 2017. In addition, Intel made investments of $320 million in private companies during the same quarter.
Inside Intel’s recent earnings filings was more information on its Mobileye acquisition. Intel expects to close the deal later this year after purchasing all of Mobileye’s stock for about $15 billion.
All those billions are coming from Intel’s overseas operations, which have only $14 billion in cash as of April 1, 2017. So Intel needs an extra billion to buy Mobileye.
TPG sold part of its interest in Intel Security to private equity firm, Thoma Bravo. On September 7, 2016, TPG’s Manta Holdings agreed to pay Intel $3.1 billion for a majority interest. Between then and now, TPG sequently sold part of its interest to Thoma Bravo, for an undisclosed amount, while still maintaining majority control over Intel Security.
On September 20, 2016, Thoma Bravo closed its Fund XII, that’s focused on software and technology companies. With a commitment of $7.6 billion, Fund XII plans to acquire between ten and twelve companies; making investments of between $200 million to $1 billion per acquisition.
Thoma Bravo’s Fund XII will adopt a “buy and build” strategy and hopes to exit investments through a sale or public offering.
It was not disclosed if Fund XII participated in the Intel Security deal, but Thoma Bravo did succeed with a similar investment when it sold Blue Coat to Bain Capital for $2.6 billion in 2015. Eventually, Bain Capital “flipped” Blue Coat again with its sale, last year, to Symantec for $4.65 billion.
It possible, TPG is looking to Thoma Bravo for the same magic. Last year, TPG agreed to purchase Mediware from Thoma Bravo.
Rather than why, how Intel purchases Mobileye is more important. On March 13, 2017, Intel announced a $15 billion deal for Mobileye, which rivals last year’s acquisition of Altera. Intel purchased Altera for $16 billion using a mix of short-term and long-term debt; but for Mobileye, Intel is using mostly all cash and little debt.
Most of Intel’s cash is overseas. At the end of last year, Intel had cash of $17 billion of which $14 billion was overseas; that latter amount is subject to taxation if returned backed to the United States. Intel said on the investor call that the Mobileye purchased will be financed with cash, and cash that is overseas.
Intel’s overseas cash will go to the Mobileye investors, who are mostly overseas. In fact, twenty percent of Mobileye is owned by Israelis: Shmuel Harlap (outside investor), Amnon Shashua (c0-founder), and Ziv Aviram (co-founder). Intel can use its domestic cash for investors located in the United States, due to the Mobileye 2013 IPO, without incurring any taxes.
Now after the Altera purchase, Intel will have little overseas cash, at least for a while. Using overseas cash for foreign acquisitions is beneficial since the U.S. company does not incur any repatriation tax. Microsoft used that strategy in the past with its acquisitions of Skype and Nokia.
Now with less overseas cash, Intel is less likely to purchase foreign companies, especial Israeli ones, at least in the short-term.
For 2016, Intel wrote down and took a loss of $184 million on its investment in private companies. These are companies where Intel owns twenty percent or less and are of the type assumed to be part of Intel Capital.
Intel’s portfolio companies also declined in terms of fair market value. At the end of December 31, 2016, the private companies had fair market value of $2.4 billion. At the end of prior quarter, the fair value at $2.6 billion.
Intel is proceeding with the divestiture of its Security Unit to private equity firm, TPG. In the press release announcing the 4Q16 earnings, Intel confirmed the sale is still expected to close in the second quarter or by June 2017. TPG will be the majority owner after the transaction is completed.
Per the 3Q16 10-K, Intel expects a gain from the sale. In addition, Intel will receive $1.1 billion from TPG. Shareholders must wait and see if they’ll get all or some of the $1.1 billion. Last year, Intel gave back $7.5 billion to shareholders in the form of cash dividends and stock repurchases.
Intel today (May 2th) released its Form 10-Q for the quarter ended April 2, 2016. While everyone paid attention to other things, the most important number was the current valuation of Intel Capital’s portfolio companies. The valuation of the portfolio decreased by 10% from the quarter ended December 26, 2015.
Inside Intel. Intel Capital’s portfolio was valued at $2.3 billion at the quarter end of April 2, 2016 while the portfolio had a value $2.5 billion at the end of December 26, 2015. Over the quarter, the portfolio declined by $200 million as estimated by Intel. Portfolio companies generally do not trade on public markets. Intel must value their “non-marketable investments” using other valuation methods.
Intel Capital did not make any significant investment in new companies over the quarter ended April 2, 2016. Total amount invested, $1.5 billion, remained the same during the recent quarter.
Power Failure. In addition, there were no write-downs, impairments, of the investments during the current quarter. For accounting purposes, Intel would need to write-down an investment if there were a significant change in the value of an investment. Last year was an exception; Intel wrote-down $160 million of its Intel Capital investments.
Fund companies must also value their investments and some on more frequent basis than Intel. For example, Fidelity updates its holdings on monthly basis. Last week, Fidelity raised the value of its holdings. Like to Intel, Fidelity and other fund companies must value their holding using other methods than market prices.
The difference, between the valuation of Intel and the mutual fund companies, is the life cycle of the company. Intel Capital is investing in early stage companies while the mutual companies are investing at the later stage companies.
More Chips? The chart below reflect the changes in the Intel Capital portfolio’s carrying value (CV) and fair value (FV) over the past two years. Carrying value is the actual amount invested in portfolio companies. The amount invested increased from $1.3 billion at the end of 2014 to $1.5 billion at the end of the current quarter. Intel investments in Cloudera and UniSpreadtrum were excluded from the reported amounts since the two companies not Intel Capital portfolio companies.
Thanks for reading; please join the blog and follow me on Twitter.