Intel Should Buy Not Sell Fast-Growing Businesses

Intel Corporation saved a big surprise for its shareholders this week. It announced the spinoff of Mobileye, its fastest-growing business. That doesn't seem to make much sense. Intel should be buying, not selling, fast-growing businesses, as it tries to catch up with fast-growing competitors like AMD and Nvidia.

There was a time Intel was growing by leaps and bounds. That was back in the 1980s and the 1990s when the semiconductor pioneer was in the right business at the right time, making the chips that powered personal computers in partnership with Intel (Wintel).

The personal computer industry is still around, but it doesn't grow the way it did in the early days. So, Intel had to re-invent itself, leverage its core capabilities to expand into growing industries like the cloud, 5G networks, AI, and intelligent and autonomous edge products. But not fast enough to maintain its old momentum. For instance, Intel's revenue growth rate has fallen from double digits to single digits in the last three years, no match for AMD's and NVDA's exponential growth.

In such an environment, one would expect Intel to buy, not sell, high-growth businesses.

That could explain Wall Street's erratic reaction following the announcement of the Mobileye spinoff. A rally in Intel's shares following the announcement faded a couple of days later, even as the overall market staged a strong rally. Apparently, Wall Street is having second thoughts about the ability of Intel to catch up with fast-growing competitor AMD, which has been expanding in the fast-growing segments of the semiconductor industry.

That isn't the first time Wall Street is second-guessing Intel. In the last 12 months, the company's shares have gained a meager 2.6%, compared to a 62% gain in AMD and 63% of the semiconductor industry average.

Still, some experts think Intel's Mobileye spinoff is a good thing, at least for the company's shareholders. Robert R. Johnson, a professor of finance at the Heider College of Business at Creighton University, is one of them.

"Intel's plan to spin off Mobileye into a publicly traded company will likely increase value for Intel shareholders," he said. "The empirical evidence from academic finance studies indicates that significantly positive abnormal returns for spinoffs, their parents and the spinoff-parent combinations are generated via these transactions. While the parent generally profits from the spinoff, the greatest value accrues [to] the entity being spun off."

Scott Turman, CEO of BrightRay Publishing, is on the same page as Johnson.

"There are several reasons Intel would want to move its self-driving intellectual property and business model into a separate spinoff [Mobileye]," he said. "Investors will automatically become investors in the new subsidiary via a tax-free distribution of the new shares, which unlocks the IP [intellectual property] value separate from Intel holdings. This unblocks outside investment, compartmentalizes risk, and helps with executive retainer and recruitment by freeing up C-level spots in the new organization."

Meanwhile, Johnson sees further advantages to the Mobileye spinoff.

"Essentially, spinoffs provide a method of transferring control of corporate assets to stand-alone entities that create greater value," he said. "Mobileye is currently advanced-driver assistance and an automated driving subsidiary of Intel. As a result, investors will likely place a higher value on that subsidiary as a stand-alone entity, in lieu of it being simply a part of Intel."

While this could be an excellent help to the stock of Mobileye, it may not help the shares of Intel.

“In essence, the spinoff allows investors bullish on the driver assistance and automated driving segment the opportunity to invest solely in that business," Johnson explains. "Specifically, there may be some investors who are bullish on Mobileye and not on the rest of Intel. The spinoff allows these investors the opportunity to place their bets on Mobileye."

Meanwhile, it will leave Intel with even lower growth rates. So, naturally, Wall Street doesn't like that.