Intel & Wind River: Much More Than Meets The Eye (INTC, WIND, MSFT, IBM, TXN)

Intel Corporation (NASDAQ: INTC) has made what many will consider as a strange merger, but there is more to this merger than meets the eye and this will give Intel higher ticket sales with high margins.  The processing giant will acquire Wind River Systems Inc. (NASDAQ: WIND) in an all-cash buyout valued at $11.50 per share.  This comes to $884 million in the total.

Wind River is a leading vendor in embedded devices.  This will become a unit in part of Intel’s strategy to grow its processor and software presence outside the traditional PC and server market segments.  This will entail into embedded systems and mobile handheld devices. Wind River has thousands of customers in a wide range of markets.

If you recall, Jim Cramer touted this stock back in early 2008 as a would-be or should-be takeover candidate.  Shares were at $8.15 then, and looking back from today its 52-week trading range is $5.61 to $12.99.  This stock has actually been public since the mid-1990’s.

Embedded systems and mobile devices are essentially new growth avenues for Intel. This includes a further and more solid move into smartphones, mobile Internet devices, other consumer electronics, auto  “info-tainment” systems and other automotive areas, networking equipment, aerospace and defense, energy, and technically into thousands of other devices. Embedded systems is a multi-billion dollar market opportunity and this will give Intel a leg up into this move.  Selling processors in a world where a huge portion is heading into sub-$500 PC’s creates the need for this acquisition.

Wind River’s board of directors has unanimously approved the transaction and the merger should close this summer.  The company has over 1,600 employees and operations in more than 15 countries. The company’s revenues for its most recent fiscal year were $359.7 million.  With the future of smaller and smaller electronics devices and with Intel behind this, the Wind River unit could start getting revenues into the “billion” hurdle rather than the hundreds of millions.

This comes at a substantial premium.  Shares closed at $8.00 yesterday, and shares are up 45% pre-market at $11.60.
The list of companies which could be possible competing buyers are probably too many to note, but Microsoft Corp. (NASDAQ: MSFT) is sort of a loose candidate, but IBM (NYSE: IBM) and Texas Instruments (NYSE: TXN) immediately come to mind as being able to easily integrate this company.  There are probably another dozen companies which could do this integration as well, but having the processor lead here does make Intel the easiest integrator by our read.

A bidding war might not be in the making here if Wind River has unanimously accepted the buyout offer.  This company would make a substantial unit for any large technology behemoth wanting to expand their moves into or deeper into embedded systems.  Technically, there are many giant technology players that could step into the fray here if they wanted to.  The question is if another company wants to outbid a company that can keep offering more and more if it needs to.  Intel has billions in capital it can tap.

Jon C. Ogg
June 4, 2009