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https://www.wsj.com/articles/whyintelpaidapremiumforastakeincloudera1493636626

TECH

Why Intel Paid a Premium for a Stake

in Cloudera
The price Intel paid for its Cloudera investment reflects the two companies deep
partnership, Cloudera Chief Executive Tom Reilly said

TomReilly,chiefexecutiveofbigdatasoftwaremakerCloudera,stoodontheflooroftheNewYorkStockExchangeonApril
28,duringthecompany'sinitialpublicofferingofshares.PHOTO:MICHAELNAGLE/BLOOMBERGNEWS

By Rachael King
May 1, 2017 7:03 a.m. ET

When Intel Corp. INTC 0.44% agreed to buy a 17% stake in big-data software startup
Cloudera Inc. CLDR 0.50% three years ago, it purchased the stock for more than double
the share price other investors had paid just two weeks earlier.

After Clouderas initial public offering on Friday, Intels $742 million investment is now
underwater, valued at roughly $434 million.

It might appear that Intel stumbled badly. But people familiar with Intels thinking say
the chip giant agreed to pay Clouderas 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 valuationcompared with $1.8 billion earlier that month when
venture investors bought inwas bound to scare away prospective buyers. Clouderas
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 Clouderas 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 companys 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 Intels 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
Clouderas software, said a person with knowledge of the deal. Cloudera requested Intel
pay more than double what those previous investors paid, saying it didnt 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 wasnt 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 Intels 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 Clouderas market value at roughly $2.3 billion.

Since Intels investment, big-data software hasnt lived up to the hype, and analysts say
Clouderas revenueup 57% to $266 million last yearhasnt 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.

Intels investment helped secure its influence in the data-center market, which
currently accounts for nearly 30% of the chip makers 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 partnershipwhich gives companies
an incentive to use servers with Intel chips if they are running Clouderas software.
Cloudera anticipates making its chips work best on Intel technology in the future as
well.

Rolfe Winkler contributed to this article.

Write to Rachael King at rachael.king@wsj.com

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