The American Kieretsu

Electronic News, May 8, 2000 by Michael Bernstein

Intel is well on its way to building a genuine Kieretsu, i.e., a Japanese term for a grouping of suppliers up and down the value stream.

Starting in the early 1990s Intel began investing part of its large cash horde in other technology-related public and private companies. That effort, now known as Intel Capital, has grown to be a several billion-dollar investment. As of the end of the first quarter of 2000, Intel Capital's portfolio of more than 425 companies worldwide was worth an estimated $10.8 billion. This up from 350 companies at the end of 1999 worth an estimated $8 billion.

The $10.8 billion includes approximately $7.8 billion in capital appreciation, and when you combine it with the nearly $450 million in capital gains Intel realized in the first quarter, you see it's doing a fairly good job picking its investments.

Most of the companies Intel invests in are Internet-related, a fact that has caused some Wall Street analysts to bemoan the negative impact U.S. stock market declines in March and April have had on the value of the portfolio. However, Intel's current intent is not to become another CMGI, although senior executive Avram Miller, who did much of the early spadework in selecting investments, did jump ship to CMGI, also one of Intel's investments. Rather Intel's motivation is to make strategic investments in companies with technologies and services that will create and expand new markets for Intel products, and thus increase revenue and profits. But don't think Intel just hands out money willy-nilly to any company that has a compelling story. It looks hard at the financial aspects of every potential investment to see if it has a solid product plan, a good management team, and the long-term viability to be a leader in its field.

Intel is not a passive investor, so it provides more than cash to those it chooses to invest in. It typically sets up linkages between the companies it invests in and the business units those companies can help, and vice versa. It provides the companies with technology and marketing assistance where needed, and equally importantly it fosters cooperative relationships between the companies in the portfolio so that they will in turn help one another.

Intel is anxious to make sure its IA-64 microprocessors are a success in the marketplace, so it expanded on the Intel Capital concept to form the Intel64 fund. This $250 million fund is focused on developing innovative enterprise solutions for IA-64-based servers and workstations. The prime investors in the fund include Compaq, Dell, Hewlett-Packard, Intel, NEC, and SGI. Additional investors include Bank of America, The Boeing Company, Circuit City, Enron, Ford Motor Co., General Electric, McKessonHBOC, Morgan Stanley Dean Witter, Reuters, Sabre, SmithKline Beecham, Sumitomo Corp., SunAmerica, and Telmex. This second set of investors provides a double benefit to Intel, because not only are they helping to fund IA-64 solutions, they are also likely to buy IA-64 based solutions.

Intel is a financially disciplined company with a huge portfolio of cash and short-term investments that generates significant bottom line investment income dollars. So it even has the funds to establish that ultimate hallmark element of any self respecting Kieretsu: its own bank. Imagine buying your next PC or server with your Bank of Intel credit card and getting one of those bunny suit characters as a premium for opening your account.

There is certainly nothing illegal or hidden about what Intel is doing, and so it is entirely possible that one day we may see Hungarian entrepreneur Andy Grove formally named Shogun of the famous Silicon Valley Kieretsu: "Inside Intel."

Michael Bernstein is president of HiTech Directions in Scottsdale, Ariz. He can be reached at mikeb@hitechdirections.com.