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On Aug. 22, the government announced it was converting Intel's CHIPS Act grants into an equity stake.
Shareholders will be diluted about 8.9%, and over 10% when factoring another $2 billion investment by Softbank.
Despite the dilution, the stock went up on the news -- and there may be a very good reason for it.
On Friday, Aug. 22, the Trump administration announced that the U.S. government would be converting $8.87 billion in CHIPS Act grant money that had been awarded to Intel (NASDAQ: INTC) into equity in the company. The government will receive just over 433 million shares at $20.47, good for about 8.85% of Intel when factoring in another recent investment by Japanese tech giant Softbank (OTC: SFTB.Y).
Needless to say, it's unusual for the U.S. government to take a stake in a major company; it's the type of thing one may find common in other countries, but typically not in the USA, the center of "free market capitalism."
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Leaving out the philosophical issue of how much government should be involved in the private sector, is the deal a good one for Intel shareholders?
While some have posited the government is throwing Intel a "lifeline," Intel was already supposed to receive this money without having to offer any shares in return. CHIPS Act grants were essentially subsidies to be paid out upon the completion of certain construction milestones for U.S.-based manufacturing fabs.
While Intel had only completed part of that buildout and other parts were still up in the air, the fact remains that CHIPS Act grants were supposed to be subsidies for projects Intel was likely to execute at some point. However, language in Intel's recent quarterly report suggested the Trump administration might not pay the funds out as prescribed by law, even as Intel is currently struggling with cash flow.
While we don't really know the dynamics behind the negotiations, we do know that at the end, money Intel was supposed to receive in return for its chip buildout had been converted to equity after the fact, flouting the CHIPS Act as it was intended. That legally dubious maneuver diluted shareholders who weren't expecting it, which really isn't a great precedent.
In the "risks" section to the filing, Intel noted that the government's stake could put some of Intel's overseas sales at risk. That could be significant, as 76% of all Intel sales were in international markets, according to the filing.
While it may seem a long shot that a customer may choose another chip over Intel solely because of the government's involvement, it's not inconceivable. After all, China just told local businesses to stop buying the Nvidia (NASDAQ: NVDA) H20 chip, shortly after the Trump administration said the government would take 15% of all H20 sales to China, and administration official Howard Lutnick said the goal was to get Chinese developers "addicted to the American technology stack."
Some free market purists may have taken comfort in the fact that the government pledged not to get involved in shareholder votes and therefore won't be dictating strategy to the company. However, that doesn't mean the government's stake won't have an impact.
In the agreement, the government agreed to vote along with the board of directors when it comes to all proposals and nominees. That means the government won't come in and impose its own agenda, but it will add to the power of the board.
History has shown that boards of directors are notoriously bad at policing themselves. Should Intel's board engage in any bad practices that outside shareholders disagree with, those shareholders will have a harder time making changes or decisions against the board's preferences.
Some have criticized Intel's board in recent years, with some shareholders noting that many members were on the board during Intel's fall from grace during the 2010s. Others have complained about the board's lack of semiconductor business experience, while others questioned last year's firing of CEO Pat Gelsinger.
Image source: Getty Images.
Intel received the first $5.7 billion of the money last week, with the remaining $3.2 billion to come as Intel fulfills commitments under the Secure Enclave program, whereby it will produce chips for the U.S. military. So Intel gets help with its balance sheet now, instead of having to build and complete projects in the future on an uncertain timeline. That could certainly put potential customers' minds at ease when deciding whether to use Intel as their foundry.
In addition, Intel is free of other burdens, such as certain workforce requirements spelled out in the CHIPS Act. And Intel is also now freed from an "excess profits" clause, whereby it would have to pay cash flow above a certain threshold for each funded project back to the government.
So while shareholders are diluted, if Intel does become wildly successful in foundry, there may now be more upside than there was before.
While it's unlikely the government will directly force chip customers to use Intel, it's possible the government's stake could spur customers to choose Intel over Taiwan Semiconductor Manufacturing (NYSE: TSM) if customers are on the fence and having to make a close choice.
After all, major tech companies such as Apple (NASDAQ: AAPL) have announced large U.S. investments to get on the administration's good side, so one could easily see a scenario whereby a customer shifts at least some production to Intel's foundry, IFS, as a gesture of goodwill.
Moreover, the Trump administration has been open to using "sticks" as motivators to get companies to build more in the United States. Using Intel's foundry may be a way to get around restrictions, tariffs, or unique taxes the government might otherwise impose in the future.
It was interesting that just before the announcement of the government's investment, Intel announced a $2 billion equity investment from Japanese tech conglomerate Softbank just a few days prior.
Like the government's stake, Softbank's investment is for Intel equity, not just the foundry. And also like the government's investment, there were no apparent "strings" attached. However, it seems likely Softbank will steer one or more of its portfolio companies to use Intel foundry in the future.
Most notably, Softbank owns 90% of Arm Holdings (NASDAQ: ARM), whose chip architecture is used in a variety of low-power applications, such as smartphones and certain data center chips. Arm has reportedly been contemplating building its own AI chips. If that homegrown chip plan comes to fruition, it's possible Arm could use Intel foundry to build them.
Softbank has also made other big AI-related announcements this year. In May, it announced the acquisition of private AI chip company Ampere for $6.5 billion. Interestingly, Ampere's founder and CEO is an ex-Intel executive. Softbank is also collaborating with OpenAI on several AI ventures, including Stargate, the massive $500 billion AI data center infrastructure project based in the United States. Another is Cristal Intelligence, an enterprise-focused AI solution co-developed by both Softbank and OpenAI.
At last week's Deutsche Bank technology conference, CFO David Zinsner said it was a "coincidence" that Softbank had invested in the same week as the U.S. government. However, the timing does raise questions as to whether Softbank would have directly invested had the government not been in talks already. And if Intel needs to raise more money in the future for its 14A buildout, the government's involvement may also give confidence to future investors.
Finally, the government's investment could show confidence in Intel's technology. While it's true that Intel was owed this money anyway, the government also could have continued withholding the money if it didn't think Intel had any hope for a turnaround.
While we can't know what Lip-Bu Tan and other Intel executives discussed with the administration, it's clear that the administration gained more confidence in Intel over the past few weeks, with President Trump at first insisting on Tan's firing, only to then invest billions of dollars alongside him after their meeting.
Could Intel be on the brink if better things? Remember, Intel's 18A node was supposed to achieve technological equality with TSMC after a decade of underperformance, and 18A is set for its first production later this year, with Intel's Panther Lake CPU. 18A sports new innovations such as backside power, which TSMC won't introduce until later this decade, as well as gate-all-around transistors. There is also the possibility that Intel is going to use high-NA EUV technology on 18A, even though Intel originally slated high-NA use for its future node, 14A. After all, Intel has already purchased several high-NA machines and was the first company do so.
In any case, with Intel's first 18A chip due out later this year, it's possible the government saw improvement on the horizon.
While the government's investment is certainly a strange turn of events, it seems the potential "goods" outweigh the "bads" at this point.
That's because the most important element here is Intel's ability to land customers for its foundry. If more customers sign up for IFS than they otherwise would have based on the government's stake, then the deal was likely to be worth it.
That's probably why, despite the shareholder dilution, Intel's stock went up on the news.
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Billy Duberstein and/or his clients have positions in ASML, Intel, and Taiwan Semiconductor Manufacturing. The Motley Fool has positions in and recommends ASML, Intel, Nvidia, and Taiwan Semiconductor Manufacturing. The Motley Fool recommends the following options: short August 2025 $24 calls on Intel and short November 2025 $21 puts on Intel. The Motley Fool has a disclosure policy.
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