While Intel Corp. has struggled to keep up with the staggering pace of innovation set by its peers, analysts say a sale to one of those companies would not be a quick or easy solution.

The US-based chipmaker faces a steep climb back to relevance after being lapped by NVIDIA Corp., Broadcom Inc. and Taiwan Semiconductor Manufacturing Co. Ltd. on next-generation AI chips. In this environment, the company has become a potential takeover target with reports indicating that Qualcomm Inc. and Arm Holdings PLC have expressed interest in some or all of Intel's assets.

However, analysts note that any deal for Intel faces multiple challenges. First, even though its stock price is down this year, Intel still has a $96 billion market cap and an extensive real estate footprint. It also has a large foundry business that is expected to record operating losses into the foreseeable future. Second, regulators across the globe have previously blocked semiconductor transactions, making any Intel deal difficult for would-be buyers. Third, the company faces tough competition from deep-pocketed players that are already further along in their AI evolution.

"The speed of this whole transition to generative AI-focused chipmaking is making the turnaround at Intel exacerbatingly more difficult," said Brenon Daly, a tech M&A analyst at S&P Global Market Intelligence 451 Research.

"The timing, in many ways, couldn't be worse. Intel was going to have to figure out what it was doing with its various businesses at some point. And now you compound that turnaround with market forces that are pushing it even further back."

Evolving marketplace

Intel's performance is a case study in how mature companies adapt to new environments, Daly said. Microsoft Corp., which reached a $15 billion deal with Intel in February to produce custom chips, was once inseparable from Intel and marketed its PCs with Intel chips as part of its core offerings. But Microsoft has so far proved more in step with the cutting edge of AI-infused silicon and pivoted to companies such as Advanced Micro Devices Inc. to power its OpenAI offerings through its Azure cloud computing platform.

"Microsoft has done it exceptionally well and rewarded its shareholders along the way," Daly said. "Intel hasn't, and its shareholders, unfortunately, haven't participated as the technology industry has built hundreds of billions and trillions of dollars in value over the past couple of decades."

Over the past two years, Intel shares are down more than 56%. Microsoft shares are up more than 47% and the broader S&P US BMI Information Technology index is up 54%.

Regulatory pressure rising

While the decline in Intel's share price could create a buying opportunity, any combination would likely face opposition from regulators globally.

In 2022, NVIDIA dropped its bid to acquire Arm amid "significant regulatory challenges," including an in-depth phase two investigation from the UK Competition and Markets Authority.

Broadcom's bid to buy Qualcomm in 2018 was blocked by then-US President Donald Trump, who cited national security concerns as the primary driver for vetoing the transaction. That same year, Qualcomm terminated its effort to buy NXP (Chongqing) Semiconductors Co. Ltd. The deal, announced in 2016, failed to win antitrust clearance from China's State Administration for Market Regulation before the termination date amid escalating trade tensions between the US and China.

Regulators in China will often avert large deals in the semiconductor industry by dragging them out until both parties walk away, said CFRA Research analyst Angelo Zino.

Whether the opposition stems from retaliation in response to US trade measures imposed against China, or increasing antitrust scrutiny from the UK, the EU or the US, deals will likely need to be smaller and more strategic to get through.

"That's probably the most salient risk to any sort of transaction, not only the publicly discussed one about Qualcomm and Intel but really, any sort of M&A deal involving big chipmakers has risk hanging over it," said Chris Miller, a nonresident senior fellow at the American Enterprise Institute and author of Chip War: The Fight for the World's Most Critical Technology.

The increased scrutiny has led to a notable drop in tech transactions. The market is on pace to record the second-fewest peer-to-peer deals completed on an annual basis since 2001 — with just 25 deals completed year-to-date, according to 451 Research's M&A KnowledgeBase.

When the chips are down

Given the sheer volume of obstacles, analysts remain skeptical that a Qualcomm-Intel merger is on the horizon.

Zino places the odds of a deal being consummated at less than 20%. "We note China/Europe's regulatory approval is far from certain, while Intel's financial position likely limits Qualcomm from even considering a deal significantly above current levels," the CFRA analyst wrote.

Despite this pessimism, the analyst sees the logic behind the rumored deal.

"They do have a lot of complimentary offerings," Zino said. "Qualcomm doesn't manufacture chips. Intel does. You can get Qualcomm on Intel's ecosystem and help drive that foundry business."

Daly, meanwhile, said his outlook on the deal has less to do with the regulatory environment and everything to do with Qualcomm's and Intel's finances.

"They simply can't afford it," Daly said. "Even with the divestitures that would be expected, the reorganizations of the business, the cost savings, it would still be financially problematic. It would be so heavy a burden financially for Qualcomm to take on, it just doesn't make sense."

451 Research is a technology research group within S&P Global Market Intelligence.