Deals and IPOs

Why Intel needs to buy Altera: Expert

Intel nears deal to acquire Altera for $17B
Intel nears deal to acquire Altera for $17B

Intel's purchase of smaller chipmaker Altera is necessary for the company to overcome technological hurdles, GVA Research's David Garrity said Monday, shortly before the deal was officially announced.

As Intel continues to reduce the size of its chips, its ability to use the full benefit of those chips is limited, Garrity said. However, Altera's integrated circuits, which use a technology called field-programmable gate array, provide a way for Intel to improve the performance of its chips at a slightly higher cost.

"One would argue limitations to Moore's Law require Intel to do something, and with this transaction they will make that move," Garrity told CNBC's "Squawk Box."

Read More Intel to acquire Altera for $54 a share

Moore's Law holds that the number of transistors in an integrated circuit roughly doubles every two years. That observation has held true throughout decades of computer development, but industry watchers are now saying Moore's Law is running into limitations.

Intel agreed to purchase Alter for $16.7 billion, or $54 per share—a 15 percent premium over Altera's closing price last Thursday. Shares of Altera moved higher Friday after the New York Post reported the parties were nearing a deal. (See what shares of Altera are doing now.)

In a note, Garrity identified a number of factors that favor consolidation in the semiconductor space: the rising importance of data centers, improved sector revenue growth, low interest rates and available funding.

However, Intel's interest in Altera is more likely due to its need to strengthen its technology portfolio, Garrity said. While Intel could arguably develop new technology itself, it is cheaper to acquire a company that already holds the intellectual property, he added.

He said the technology play behind the bid sets the Intel-Altera merger apart from Singapore-incorporated Avago Technologies' $37 billion purchase of California-based announced last week, which he called expensive.

Read More Avago to buy Broadcom in $37 billion deal

Other potential acquisition targets who make field-programmable gate array technology include Xilinx and Lattice Semiconductor, Garrity added. While Advanced Micro Devices will run up against the same limitations Intel faces, it may not be positioned to make an acquisition, he said.

DISCLOSURE: Garrity owns shares of Intel, and GVA Research holds a greater than 1 percent share of Intel stock. GVA Research does not provide investment banking services to Intel.