Intel’s Good Bet on Automotive

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I’ve read a variety of opinions about the viability of Intel’s Mobileye acquisition, both positive and negative.  I found the framework Peter Cohen used in this recent Forbes opinion piece to be particularly interesting, as I think he’s focused on the right four questions.  However, after considering those same questions I formed a more optimistic opinion about the deal’s prospects.  Here’s why:

Is the industry in which the target company competes large, growing and profitable?

Intel has been dipping its toes into a variety of non-traditional computing applications, and they clearly like what they see in the automotive market.  That’s for good reason.

      • The requirements for self-driving cars align well Intel’s strengths in powerful, high-end SoCs.
      • The ecosystem is still relatively nascent, providing opportunity for Intel to influence its development.
      • While self-driving cars are over a decade from hitting the roads in any kind of volume, this gives Intel ample time to carve out a compelling value position.
      • I’m not actually convinced that having fully autonomous cars on the road is necessary to make this deal successful. Even without driverless cars, auto makers are pushing more and more technology into vehicles, so Mobileye’s market will continue to grow aggressively with or without full autonomy.

Intel hires a lot of anthropologists, primarily in market insights and user experience (UX) roles. I love this strategy, and I think it’s paying dividends in the company’s ability to understand how interactions between humans and technology are likely to evolve.  If any company has a shot at understanding how this market could, should, and likely will unfold, it’s Intel.

Will the combined companies boost market share and deliver better value to customers?

If Intel’s Mobileye acquisition disappoints, it will likely be the result of failing to create and monetize a compelling solution.  Intel as an organization has very little experience selling solutions, is uncomfortable playing higher up the stack, and lacks the infrastructure to drive a go to market strategy in this space.  But Intel’s leadership also has quite a bit of institutional memory, and hopefully this will translate into learning from past missteps.  They should collaborate with Mobileye on strategy and R&D, but defer to Mobileye leadership when it comes to executing the go to market plan.  If these relative strengths and weaknesses are recognized and the company behaves accordingly then it will boost market share and deliver value to customers.

Can the combined company generate enough future cash flows discounted to today to exceed the acquisition price?

I’ll wait and see.  Intel didn’t make this investment casually, but nobody can see the future.  I’m sure they made many assumptions in their financial analysis, but I assume they were conservative….and a 34% premium actually isn’t that terrible in a market with this growth trajectory and these margins.

Can the two companies agree on an organization structure and way of working that makes the deal seamless to customers once the deal closes?

Finally, with respect to playing nice with each other, I would defer to the long term, deep existing partnership between these two organizations as a reason to be hopeful.  Intel has had R&D operations in Israel for over four decades, and while a formal partnership with Mobileye was only announced in 2016, relationships were likely built over the course of several years. There is always risk when it comes to integrating two organizational cultures, but strong pre-existing relationships is one of the best ways companies can mitigate those risks. This should give the companies a head start in integrating their operations to deliver a seamless customer experience.

Not only does this deal support a key strategic objective (diversify into new computing markets), I think Intel has a real shot to make this deal accretive.

Authors

Rachel Eschle

Rachel Eschle

Partner, Boston

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