When Intel Corp. agreed to buy a 17% stake in big-data software startup Cloudera Inc. three years ago, it purchased the stock for more than double the share price other investors had paid just two weeks earlier.
After Cloudera's initial public offering on Friday, Intel's $742 million investment is now underwater, valued at roughly $434 million.
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It might appear that Intel stumbled badly. But people familiar with Intel's thinking say the chip giant agreed to pay Cloudera's high asking price in March 2014 in part because it would help guard against an acquisition of the startup by another company.
The resulting $4.1 billion valuation -- compared with $1.8 billion earlier that month when venture investors bought in -- was bound to scare away prospective buyers. Cloudera's software had gained popularity with companies analyzing oceans of digital information in their corporate servers. Intel believed big-data software was critical to helping it maintain its near-total dominance of the market for data-center servers.
With a board seat and close ties to the company, Intel could ensure its chips worked best with Cloudera's software. Critically, Cloudera agreed to improve the security of its software and add features to make it more appealing to the corporate market where Intel needed to fend off competitors.
Intel declined to comment. Cloudera Chief Executive Tom Reilly said in an interview after the company's IPO that the higher price Intel paid reflected the deeper partnership between the companies. Cloudera wanted to remain independent, and he disputed that Intel was trying to prevent Cloudera from being acquired.
The lofty price Intel paid underscores the pressure it faces to preserve the dominance in its core markets of processors for servers and personal computers. The investment also sheds light on the difference in motivation between investment firms, which aim purely for a financial return, and corporate investors, which often take stakes for strategic reasons.
Back in 2014, Intel wanted to make sure it had a say in the direction of big-data software, according to the people familiar with Intel's thinking. Big-data software was helping drive the use of chips, as companies needed more processing power to mine the vast troves of information flowing through their networks.
Intel deliberated privately for about six months over whether to invest in Cloudera or try to buy it, according to one of these people. Intel decided against trying to acquire the startup for reasons including that to do so might alienate some of its bigger partners such as Oracle Corp. and International Business Machines Corp., which also provide data-management software. On the other hand, if Cloudera was owned by another company, it might not be as concerned about making its software work best with Intel chips, according to this person.
In March 2014, Cloudera said that T. Rowe Price, Google Ventures (which is now GV, Alphabet Inc.'s venture-capital arm) and MSD Capital would invest $160 million, paying $14.56 a share at a $1.8 billion valuation.
Intel wanted in, but only if it could take a larger stake and influence development of Cloudera's software, said a person with knowledge of the deal. Cloudera requested Intel pay more than double what those previous investors paid, saying it didn't need funding after its last round, a person with knowledge of the deal said.
Later that month, Intel agreed to buy $371 million in stock from Cloudera and another $371 million in stock from employees and investors Accel Partners and Greylock Partners. In May, when the deal closed, Intel paid $30.92 a share, more than double what the venture investors had paid in the same funding round.
The bet wasn't a big cost for Intel, representing only about 5% of its roughly $14 billion in cash and short-term investments.
But the investment could mean financial pain for Cloudera employees whose restricted stock units were priced at about $26.16 in January 2015, after Intel's investment. Stock options were also issued to employees in March, but at an exercise price of $17.85, above the $15 IPO pricing. The share price rose about 21% to $18.10 on the first day of trading, putting Cloudera's market value at roughly $2.3 billion.
Since Intel's investment, big-data software hasn't lived up to the hype, and analysts say Cloudera's revenue -- up 57% to $266 million last year -- hasn't grown as quickly as expected. But the market is still nascent and Intel could still see a financial return on its investment in a few years.
Intel's investment helped secure its influence in the data-center market, which currently accounts for nearly 30% of the chip maker's revenue. About 96% of the servers that shipped last year contained Intel chips, according to market watcher International Data Corp.
Partnerships like the one with Cloudera might also help Intel as it faces increasing competition from IBM, Advanced Micro Devices Inc. and companies like Qualcomm Inc. that make server chips based on technology from ARM Holdings PLC. They are all either trying to compete in the data-center market today or are making plans to do so.
According to the IPO filing, Cloudera is designing its software to work best on Intel processors and architecture as a result of the Intel partnership -- which gives companies an incentive to use servers with Intel chips if they are running Cloudera's software. Cloudera anticipates making its chips work best on Intel technology in the future as well.
--Rolfe Winkler contributed to this article.
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(END) Dow Jones Newswires
May 02, 2017 02:47 ET (06:47 GMT)