Intel buys Infineon unit and expands wireless offer

FRANKFURT/SAN FRANCISCO (Reuters) - Chipmaker INTEL (INTC.NQ)Corp unveiled a deal on Monday to buy German chipmaker Infineon Technologies AG's wireless unit for $1.4 billion, as it claws its way into the booming smartphone market and cuts its reliance on personal computers.

The deal is the second major acquisition in two weeks by Intel with an eye to a future where telephones, tablets, cars and household appliances are increasingly connected to each other through networks.

Infineon's mobile unit, called WLS, makes mobile chips found in Apple Inc's iPhones as well as handsets made by Nokia Corp and LG Corp. Its purchase gives Intel technology in an area where it has struggled.

In a move seen as key to making desktop and mobile chips safer from hackers, Intel said on August 19 it would pay $7.7 billion to buy security software maker McAfee Inc its largest acquisition ever.

Buying WLS raises Intel's stake in the wireless market but companies like Qualcomm Inc and Broadcom Corp are competing fiercely to lead in next-generation chips that enable fast downloads of movies, music and other data.

"Without the deal, Intel was likely at the risk of being shut out of this important market," said BMO analyst Ambrish Srivastava in a note to clients. "Now, the company has a fighting chance."

Intel has long dominated the market for PC processors. Its Atom mobile chips took the low-cost, no-frills netbook market by storm, but they are rarely chosen by manufacturers to be included in smartphones.

And while a shaky economic recovery may make families think twice about upgrading their desktop computers, experts say future growth in the microchip industry lies in mobile devices.

"Computing is spreading to a wide array of connected smart devices, including laptops, cars, smartphones, tablets, smart TVs, and new categories being created almost daily," Intel CEO Paul Otellini told analysts during a conference call.

With deep pockets to fund research and development, Intel said it would speed up Infineon's move into Long Term Evolution, or LTE, a high-speed wireless technology that many of the world's biggest operators are planning to use for network upgrades.

Infineon had planned to offer chips for LTE-enabled devices by 2012 but that may be late in the game with many operators already building LTE networks.

"Intel's proposed acquisition of Infineon's wireless business unit, while a step in the right direction, is by far no guarantee of success for Intel in smartphones," Robert W Baird & Co analyst Tristan Gerra wrote.

STAND-ALONE UNIT

Intel plans to keep Infineon's mobile unit independent once the cash transaction closes in early 2011 and expects the deal to be neutral or slightly dilutive to earnings.

Meanwhile, rivals based on UK-listed ARM's chip design -- which is said to be more power-efficient than Intel's current offerings -- continue to grab market share.

Infineon shares fell 3.8 percent to 4.434 euros in Frankfurt, widening losses from Friday, when Intel warned its third-quarter revenue would fall short of its own expectations due to weak consumer demand on personal computers.

"Investors had hoped for a higher price and, additionally, we expect profit-taking on the long-expected deal," analysts at Alpha brokerage wrote.

People familiar with the matter told Reuters on Friday an Intel-Infineon deal would likely be reached soon.

Intel shares fell 2.01 percent at $18.00 on Nasdaq late Monday afternoon. At least three brokerages cut their price targets on Intel's stock, bracing for a weak quarterly performance from the semiconductor bellwether.

SPECIAL DIVIDEND FOR INFINEON?

The deal will allow Infineon to focus on its core segments: automotive, industrial and chip card security.

"There is one thing I have learned over the past 15 years -- at the end of the day in technology portfolio, size matters if you want to maintain leadership," said Infineon Chief Executive Peter Bauer.

Bauer, who took the helm in mid-2008, turned around Infineon's mobile chip unit after years of losses. It now generates around 30 percent of Infineon's total revenue and ranks No. 5 in the chipset industry.

Asset sales may also open the door for a special dividend for Infineon shareholders, who have not seen a payout in years. Bauer said he could not comment on a dividend.

The deal comes amid a flurry of global M&A activity as companies struggle to boost revenue in a weak economy.

According to Thomson Reuters data, nearly $200 billion in mergers and acquisitions has been announced in August, already making it the third-best month so far this year in terms of money committed to deals.

Evercore was Intel's financial advisor for the deal, while JP Morgan advised Infineon.

(Reporting by Nicola Leske and Noel Randewich; additional reporting by Manasi Phadke in Bangalore and Sinead Carew in New York; Editing by Andre Grenon and Richard Chang)