The United States government has reached an agreement to convert the grants issued to Intel Corp. under the CHIPS Act into an equity stake. While many reasons were advanced in support of the government acquiring an ownership stake in the tech company, there are a number of implications that investors and analysts ought to ponder.
For starters, the CHIPS Act passed during the Biden administration was intended to make investment on U.S. soil attractive so that the country could gain security and other strategic benefits from luring semiconductor manufacturing to the U.S. The tax credits, grants and other forms of assistance under that law would address some of the challenges like higher production costs in the U.S. when compared to producing the semiconductors in Asia and other low-cost jurisdictions.
So, what happens to the attractiveness of the U.S. as a manufacturing hub if incentives turn out to be a sort of backdoor through which firms are compelled to give up equity? Existing investors in Intel need to watch this developing situation closely and be sure that their interests will not be compromised in any way by the indirect role of government in decision-making at the firm.
The American government isn’t acquiring Intel stock motivated by the generosity of its heart. It has its own geopolitical interests to protect, and investors would be well advised to keep a close eye on whether the geopolitical interests of the government align with the business interests of the company. For example, will Intel give more attention to developing products that meet the security and geopolitical goals of the government while giving reduced attention to developing commercially-viable products that will advance the broader interests of investors who expect long-term value from their investment?
Given that Intel’s financial health is still shaky, with gross margins reducing by approximately 10% from 2022, could the equity acquisition by the U.S. government boost market reach for the company or will it make certain buyers more hesitant to do business with the company for fear of the company’s products being used for undisclosed purposes like obtaining data on countries regarded as rivals or threats to U.S. interests?
The U.S. government’s decision to acquire Intel stock is uncharted territory in recent times, and a lot of good could come out of this situation, though risks also exist. It remains to be seen how the situation is managed, and whether Intel will now make products that compete with those of leading players in the global semiconductor industry like Taiwan Semiconductor Manufacturing Company Ltd. (NYSE: TSM).
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