An Intel and Philips match?

By Junko Yoshida and Peter Clarke

Paris -- January 30, 2006 — As Royal Philips Electronics moves ahead with its plan to spin off its semiconductor division, a surprising name has cropped up on analysts' lists of potential suitors: Intel Corp.

Industry matchmakers have also pegged Infineon Technologies AG and current Philips research partners Freescale Semiconductor Inc. and STMicroelectronics NV as suitable candidates for a merger or acquisition deal with Philips Semiconductors. But the arguments in favor of Intel are compelling.

An Intel-Philips deal would tie the world's largest producer of chips to one of the world's largest producers of consumer electronics. Intel would get systems-level insight into digital consumer applications--a sector it must attack vigorously if it does not want to lose chip market share to Samsung Electronics Co. Ltd. and Texas Instruments Inc., which Gartner Dataquest ranks second and third, respectively, behind Intel in the global chip rankings.

An Intel-Philips deal might also appeal to Philips Semiconductors' consumer electronics customers. "Let's face it, the X86 architecture is becoming dominant across the board in the consumer electronics market," ob- served one executive at a computer chip company. An Intel overture to Philips would be "a big plus for the CE industry," the executive added, asserting that Intel and Philips Semiconductors have "a shared vision" and that an alliance "could offer a long-term value proposition for shareholders of both companies."

But other realities argue against the pairing. Intel, already the world's No. 1 chip vendor, may not need to acquire Philips Semiconductors to gain access to design sockets that now go to Philips parts. And smaller chip companies like Infineon and Free- scale, faced with what many say is the likely prospect of industry consolidation, may be more amenable to a deal, approaching it from an "acquire or be acquired" perspective.

Intel's size does not render the company immune to industry pressures. Doug Freeman, senior analyst at American Technology Research, called the courtship talk "a distraction to In- tel" and its "turnaround efforts."

Malcolm Penn, founder and chief executive of Future Horizons, a U.K.-based research consultancy, called the pondered pairing "a high-risk marriage."

Intel would be "an interesting choice," said Alan Brown, research director at Gartner Inc. But he considers Infineon, ST and Freescale--in that order--safer bets.

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