"Analysis" Investors worry that Trump's Intel deal marks the beginning of a new era of U.S. intervention in industrial policy

The $11.1 billion policy aid will be converted into a 9.9% stake in Intel.

Investors are concerned about government intervention in private enterprises.

Documents submitted by Intel indicate shareholder equity dilution and reduced voting rights.

Reuters, August 27 - The latest move by the U.S. government to hold equity in Intel (INTC.O) has raised concerns among some investors that President Trump's transaction signals the arrival of a new era of government intervention in private enterprises, especially after Trump called for the resignation of the computer chip manufacturer's CEO.

The transaction, announced on Friday, converts $11.1 billion in funding from the CHIPS Act and other government funds into a 9.9% stake in Intel. The press release announcing the deal included statements from companies like Microsoft (MSFT.O) and Dell (DELL.N), praising the move.

Investors stated that this level of compliance is not typically how the relationship between corporations and Washington should be. Trump had stated on social media that Intel CEO Pat Gelsinger wanted to keep his job, "but ended up giving us $10 billion."

"If the president can take 10% of a company just by threatening the CEO, that sets a terrible precedent," said James McRitchie, a California private investor and shareholder activist holding Intel shares. He noted that the statement effectively conveyed the message: "We love Trump, and we don't want 10% of the company taken away."

Intel's stock closed at $20.41 on August 6 (the day before Trump called for Gelsinger's resignation) and then rose steadily, closing at $24.56 on August 15 (the last trading day before the terms of Trump's deal surfaced). On Tuesday, Intel closed down 1% at $24.35. A securities filing indicated that the agreement did not grant a board seat to the U.S. Department of Commerce and required the department to support the board in nominations and proposals. However, the Commerce Department could vote "at will" on several other issues.

Fitch Ratings stated that this transaction would not enhance Intel's BBB credit rating, which is only slightly above junk status. Fitch noted in a research report on Tuesday that while the transaction provides more liquidity, it does not fundamentally improve customer demand for Intel chips.

Reduced voting rights

Intel's filing also indicated that the transaction diluted existing shareholders' equity, reduced their voting rights, and could subject the company to additional regulation or restrictions in other countries. Furthermore, CEO Pat Gelsinger stated that Intel does not need this funding. SoftBank invested $2 billion in Intel three days before Trump announced the news.

This is the latest instance of significant intervention by the Trump administration in private companies, following the announcement in July of a military agreement with a mining company to acquire its shares and exert influence in the acquisition of U.S. Steel by Japan's Nippon Steel (5401.T). U.S. Secretary of Commerce Gina Raimondo stated on Tuesday that the Trump administration may take a stake in defense contractors However, in some European and Asian countries, the actions of the United States may be seen as normal, as the governments of these countries already hold stakes in large enterprises. For example, the state of Lower Saxony in Germany holds a 20% stake in Volkswagen (VOWG.DE).

Richard Hardegree, Vice Chairman of UBS Technology Investment Banking, stated, "The Japanese government, South Korean government, Taiwanese government, Singaporean government, and Malaysian government have been doing this for years. In Italy and France... since everyone realized the importance of semiconductors... they have formulated a large number of industrial policies for the semiconductor industry over the past four to five decades."

During the 2008-2009 financial crisis, Washington also invested in several key companies on the brink of bankruptcy, but these arrangements were only temporary. Pressuring otherwise healthy companies to maintain long-term equity stakes is historically unprecedented, raising concerns among some investors.

Blurred Lines

Rich Weiss, Senior Vice President and Chief Investment Officer of Multi-Asset Strategies at American Century Investments, stated that future federal investments "will require regulations and guidelines to limit opportunities for abuses such as insider trading."

He said, "In the absence of controlled government direct investments, the risks for investors trading these companies may increase."

Some investors and representatives mentioned similar risks, such as the need for boards to weigh competing interests when making decisions about new factory locations, layoffs, or efforts to penetrate overseas markets.

Robert McCormick, Executive Director of the Council of Institutional Investors, stated that company goals and national goals can easily conflict on these issues. The council's members include national pension funds and other large shareholders. He said, "Government investment in a private entity may create conflicts over what is right for the company and what is right for the country."

Kristin Hull, Chief Investment Officer of Nia Impact Capital, a California-based activist investment firm, expressed that she has "more questions than confidence" regarding this equity stake. Nia manages Intel stock for clients, and its fund holds shares in other chip manufacturers, including TSMC (2330.TW) and AMD (AMD.O). Hull stated in an interview, "I think the lines between government and the private sector have indeed blurred."

A representative from Intel stated that the company's board has approved the stock issuance transaction. The representative did not comment further. When asked about insider trading concerns, the representative quoted a statement from a press release: the U.S. government will not have board seats or "other governance or information rights."

A representative from Microsoft declined to comment. A representative from Dell did not respond to reporters' inquiries