Intel’s potential merger with GlobalFoundries is smart business. Here’s why.

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With an announced offer of $ 30 billion for contract chipmaker GlobalFoundries,

Intelligence

appears to be taking another important step forward in its plan to double its manufacturing operations under the leadership of Managing Director Pat Gelsinger.

Shares of Intel (ticker: INTC) were down 0.2% to $ 55.70 on Friday afternoon, as the benchmark PHLX Semiconductor, or Sox, fell 0.9%.

Adding GlobalFoundries’ capabilities to Intel would represent a step forward in the company’s plan to become a subcontractor. This would give Intel several new manufacturing plants and a substantial customer base with the necessary sales and marketing infrastructure to keep revenue flowing.

Baird analyst Tristan Gerra called the deal a “very attractive value proposition” and said one of its most important aspects could be the corporate culture of a foundry company used to serve multiple clients. This is an area where Intel lacks expertise.

In addition, GlobalFoundries has long term agreements with customers that would be both valuable to Intel and increasingly lucrative over time. Intel has advanced manufacturing capabilities that GlobalFoundries chose not to leverage a few years ago, for example. Customers using GlobalFoundries’ legacy manufacturing technology would have the option of switching to Intel’s advanced processor or “core node” manufacturing techniques if they needed to.

GlobalFoundries clients have included

Qualcomm

(QCOM) and rival of Intel

Advanced Micro-Devices (AMD).

The deal is unlikely to reshape the semiconductor industry, but it will further expand Intel’s domestic chip manufacturing capacity at a politically opportune time. Both Congress and the White House have made clear their interest in securing sufficient domestic chip manufacturing capacity, which could mean the deal could overcome any regulatory challenges. The federal semiconductor push includes $ 50 billion in incentives to boost domestic chip production and research.

“It is understood that as you become more dependent on two countries – and it is actually mainly Taiwan Semi in Taiwan – there is a risk to your supply chain,” said Max Gokhman, Head of Asset Allocation at Pacific Life Fund Advisors. “Especially given what China is potentially aiming to do in the long term.”

The talks were reported Thursday evening by The Wall Street Journal, but Gerra de Baird said Barron that the two sides have been in talks since at least April, based on knowledge of the situation from its industry contacts. Thursday’s report, he said, suggests the potential deal is receiving more attention among senior executives.

“This does not mean the deal will be done,” he said. “But that certainly means that negotiations are taking place at a higher level.”

Intel and GlobalFoundries declined to comment.

Since GlobalFoundries is a private company, there is little publicly available information on its financial performance. A Barron Searching for available data led to the location of a single secured loan of $ 514.5 million taken out by GlobalFoundries. Gokhman said the loan, which was due to mature in 2026, was not a significant leverage for the company.

The lack of financial data makes it difficult to assess the transaction. The $ 30 billion price would be the same as the valuation under an initial public offering plan, aannounced by its current owner, Global Mubadala Investment, an investment arm of the Abu Dhabi government.

With that in mind, Gerra said that since the new semiconductor manufacturing plants cost around $ 10 billion, Intel would likely get a good deal. GlobalFoundries website says it operates factories in at least five locations around the world, including three in the United States

According to Gerra’s research, GlobalFoundries generates 20% margin for earnings before interest, taxes, depreciation and amortization.

Write to Max A. Cherney at [email protected]