Holding an outsize position in Altera (ALTR) since January 2014 when I suggested a $44 price target, I was gratified to see the company accept Intel's (INTC) offer at $54 per share.
The way the news developed was peculiar in that there were repetitious leaks, to multiple news outlets, keeping the market posted on the situation as it developed. The WSJ got first and last, with Bloomberg, the NY Post and I forget who else filling in the middle slots. The orchestration was obvious, and I considered it manipulative. I sold covered calls on ALTR at the June 44 and 47 strikes, figuring if the stock was going to be batted around I might as well get paid to watch.
When the news of the deal came out, the stock went up over $50 and I closed the entire position, since the short calls had little if any time value and I had no further profit to take. While there may be money to be made while the deal is pending, that's a specialty area and I don't play there.
I have a double size position in Intel, dating back to December 2013 when the stock traded in the $24 area and I suggested $46 as a potential value, while calling for the stock to reach $35 before the end of this year. It's done that.
The basic thesis was that Intel spends huge sums on R&D and capex, while maintaining fine ROIC and/or ROE. If the company has a history of successfully investing in itself, and continues a high level of investment, the most likely result is positive performance.
Intel's presentation after the announcement demonstrates sound strategic thinking. It covers the explosive potential of FPGA technology when applied to server acceleration, as well as the potential market, driven by Moore's law, to displace ASSPs and ASICs. I had been looking for great things from Altera, and Brian Krzanich sees the same potential.
Valuation
From my point of view, Intel did not overpay. There was and is a large, poorly defined upside potential to Altera's operation. Intel's financial muscle and synergies in IP make that potential more likely to reach fruition.
I'm on record valuing Intel at $46, while holding reservations as to whether Mr. Market will ever pay up. Time is a four letter word on Wall Street, and the upside potential created by the Altera acquisition may take years to manifest itself in full blown form. No doubt various pundits will take turns second guessing Intel's decision and disparaging it as the top of a M&A feeding frenzy.
Investment Reaction
I sold covered calls at $35 over half my Intel position. The thinking is, if the stock fluctuates around that point for a period of time while the Altera deal is completed (or not), I want to be paid to leave my money on the table. At the same time, I would like to participate if the market comes around to my point of view and moves the stock up toward my $46 estimate of value.