Is Intel's Buying Binge a Good Thing?

I’ve learned from experience that investors need to pay close attention when companies go on shopping sprees. That’s because acquisitions, particularly large ones, rarely have a neutral impact on the buyer. Rather, they tend to make the buyer either more competitive and profitable or more distracted and bureaucratic.

So when Intel (symbol INTC (opens in new tab), $36) recently announced plans to buy Mobileye (MBLY (opens in new tab)) for $15.3 billion—enough to consume nearly all of the cash and investments on the semiconductor giant’s balance sheet—I knew I had to get to work. When I launched the Practical Investing portfolio in October 2011, Intel was one of my first purchases. Including dividends, the stock has earned 88%, despite sluggish sales and declining earnings. Over that period, however, Vanguard Total Market ETF (VTI (opens in new tab)), the exchange-traded fund I use as my benchmark, has more than doubled.

A lagging stock doesn’t necessarily concern me. What does worry me is that Intel’s purchase of Mobileye is its second huge deal in two years, the other being the $16.7 billion deal for Altera Corp., completed in December 2015.

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Wasted money. Intel doesn’t exactly have a stellar history when it comes to big takeovers. An $11 billion buying spree in the 2000s went nowhere, with Intel eventually selling or shutting down most of the firms it had acquired. Much the same happened with Intel’s acquisition of security software maker McAfee, bought in 2010 for $7.7 billion. Last year, when Intel sold a majority stake in McAfee to a hedge fund, the unit was valued at just $4.2 billion. Responding to questions about this sorry history after the announcement of the Mobileye deal, CEO Brian Krzanich told CNBC that Intel’s buyouts have been more successful since he became CEO in 2013. However, given that Altera is the only major deal Intel has made during his tenure, it seems premature to claim victory.

That said, Mobileye and Altera bring important benefits to Intel. In short, both own cutting-edge technologies to feed the vast and rapidly expanding market for machines that think and respond to their environments.

Mobileye, based in Israel, is a leading developer of camera-based driver-assistance technology. Its sensor systems are used to prevent accidents and, eventually, will serve as the eyes of self-driving cars. Altera, now known as Intel FPGA, makes “field-programmable gate array” technology. Unlike old-style computer chips, which were programmed for life, FPGAs can be reprogrammed to fix bugs or adapt to changing technologies. These chips are already used in car safety systems.

Krzanich says he wants Intel to be a leader in self-driving-car technology, a market he believes will eventually generate annual sales of $70 billion. Plus, he believes that the vast quantity of data Intel’s chips can collect while being used in self-driving cars will help the company expand its efforts in artificial intelligence. How? Multiple cameras will gather second-by-second data about the environment outside of a car—whether a bustling city or a serene forest—and the internal workings of a vehicle. The more data, the more connections and correlations and the greater the chance you can teach a machine to react with increasing logic to unfamiliar circumstances and terrain.

But a shareholder must ask whether any of this is likely to boost Intel’s profits—and the price of its stock. Krzanich says it will. UBS technology analyst Stephen Chin agrees, predicting that Mobileye will boost Intel’s profits by 3% in the first full year after the merger is completed and 5% in year two. I’m skeptical, but I’m willing to hang on to see if the car of the future can drive better results at Intel.