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Altera, Xilinx Downgraded At Morgan Stanley Following Intel Talks

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In a report published Monday, Morgan Stanley analyst Joseph Moore downgraded shares of both Altera Corporation (NASDAQ: ALTR) and Xilinx, Inc. (NASDAQ: XLNX) to Equal-weight on concerns that Intel Corporation (NASDAQ: INTC) might "price aggressively" longer term.

"While we can see why Intel might be interested, and we like Altera's business and franchise, we see relatively limited potential for strategic or cost synergies," Moore argued. "Further, we see limited potential accretion for Intel particularly when comparing to other uses of cash (i.e., stock buyback, as the net cost of buying Altera would likely be roughly 2 years of Intel free cash flow ex dividend)."

Moore continued that nevertheless, an acquisition could be a "good deal" for Intel, just not one that could be a meaningful driver for the stock. A hypothetical combination would diversify Intel's end-market exposures only "slightly" as Altera would account for just over 3 percent of revenues, growing 5 percent to 7 percent long term.

Related Link: Would An Intel-Altera Merger Be Good For Shareholders?

As for Altera, Moore is "stepping to the sidelines" as shares now trading above intrinsic value as shares closed Friday at $44.39. Absent any M&A activity, with an estimated 5 percent to 7 percent growth rate, it would take several years for the stock to get to its current levels.

Moore also noted that Xilinx has several short-term concerns, specifically FPGA pricing discipline may erode if Altera becomes a part of Intel. The analyst argued that it is "hard for us to imagine" Intel passively accepting a 42 percent FPGA market share in a duopoly and not using its foundry margin as a weapon.

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