Intel's purchase of Altera defends its datacenter dominance

(Repeats to widen distribution)

By Lehar Maan and Bill Rigby

BANGALORE/SEATTLE, June 1 (Reuters) - Intel Corp's $17 billion purchase of programmable chip maker Altera Corp (NasdaqGS: ALTR - news) is a costly defensive move to ward off rivals in the prized datacenter business it dominates, analysts said on Monday.

Intel (Swiss: INTC.SW - news) 's biggest acquisition ever will let the Santa Clara, California company offer twice the computing power when its Xeon processors used in servers are combined with Altera's programmable chips.

With a stagnant PC industry and little progress in smartphones, selling high-end server chips is an increasingly important source of profits.

"This whole deal is defensive for the datacenter," said Bernstein analyst Stacy Rasgon, who saw it as an admission by Intel that it was getting harder to drive performance gains.

He questioned Intel's projections for the programmable chip market, which is built on datacenter use and growing adoption of Intel chips in everyday objects connected to the Internet. "I think their growth goals are ludicrous," he said. "They think it's going to grow 7 percent a year, but Altera shrunk 2 percent a year in the last three years."

Still, big data companies such as Google (Xetra: A0B7FY - news) , Facebook (NasdaqGS: FB - news) and Microsoft (NasdaqGS: MSFT - news) are all tweaking their servers to get their datacenters to run faster and more efficiently. Microsoft has tried using programmable chips combined with Intel's Xeon processors.

Altera's chips, called field-programmable gate arrays (FPGA), can be configured as needed to make servers faster at handling proprietary tasks, like providing web-search results or updating social networks.

"You can put your software down into the silicon," Intel chief executive Brian Krzanich told CNBC in an interview.

Intel, which analysts estimate has more than 90 percent of the datacenter market, already has an agreement to use Altera chips. Its move comes as companies such as Qualcomm (Swiss: QCOM.SW - news) Inc, using ARM Holdings (LSE: ARM.L - news) -designed chips and the soon-to-be merged Avago Technologies and Broadcom Corp (NasdaqGS: BRCM - news) , also target the datacenter market.

By buying Altera, Intel avoids the risk of being dropped as the smaller company's manufacturing partner, which had been the subject of some speculation, said Gartner (NYSE: IT - news) analyst Mark Hung.

The purchase means Intel is hedging against the likelihood that the rise of FPGA chips will reduce the need for central processing unit (CPU) chips running servers, where Intel currently dominates.

"This way Intel will profit if customers use FPGAs instead of CPUs," said FBR Capital markets analyst Christopher Rolland. "Intel will be the only company that will be able to combine x86 server CPUs with FPGAs onto a single die. This could eventually be a $1 billion market, with the lion's share going to Intel." (Reporting by Lehar Maan in Bangalore, Bill Rigby in Seattle, Diane Bartz in Washington; Editing by Diane Craft)