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Intel President and CEO Paul Otellini gives his keynote speech during 2008 International CES in Las Vegas on Jan. 7, 2008.

Facing one of the most daunting challenges in its history, Intel (INTC) for the first time will formally consider hiring its top executive from outside the company, after Monday's surprising announcement that CEO Paul Otellini will retire in May, three years shy of the mandatory retirement age.

Whoever succeeds him faces a formidable task, with the personal computer business that has long fueled the Santa Clara chip giant severely weakening and the fast-growing mobile-device markets it is trying to enter already heavily dominated by chip competitors.

"It's a little strange for this to be happening, to kind of put the company into this limbo, just at a time when there's a lot of concern about the strategic direction the company is taking," said Linley Gwennap, an analyst with the Linley Group. "It's a very critical point. Intel is facing a lot of issues right now with the PC business flattening out."

Gwennap also was surprised by the company's disclosure that it will look for a possible CEO replacement outside the firm -- as well as inside -- adding that, "in the past, the succession at Intel has been worked out and predetermined almost like the Chinese government."


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The 62-year-old Otellini, who became the company's fifth CEO on May 18, 2005, succeeding Craig R. Barrett, could not be reached for comment. But in a statement issued by the company, he was vague about his decision to leave.

"I've been privileged to lead one of the world's greatest companies," said the departing chief executive, who joined Intel in 1974 and turned 62 on Oct. 12. "After almost four decades with the company and eight years as CEO, it's time to move on and transfer Intel's helm to a new generation of leadership."

Although previous Intel CEOs Robert Noyce, Gordon Moore and Andy Grove retired well before 65, Otellini had been widely expected to remain until he hit that milestone, the mandatory retirement age. Some analysts speculated that his leaving now may be linked to the sluggish progress Intel has made getting its chips into smartphones and tablets.

"Otellini's departure could be related to the immense challenges Intel faces in competing in the mobile space," FBR Capital Markets analyst Craig Berger concluded in a note to his clients.

But Intel spokesman Chuck Mulloy said the corporation's board had been surprised when told of Otellini's decision. He added that while "this is the first time that we've disclosed that we will be looking inside and outside" for a CEO replacement, that doesn't mean the board has a preference about that.

"Regardless of how qualified the internal candidates are, one should at least look at who is available," Mulloy said. "It's just good, sound, fundamental corporate governance to do it this way." Several media outlets reported the board is leaning toward an insider.

In disclosing Otellini's plans, Intel also announced several promotions of executives who conceivably could be candidates to replace him. Named executive vice presidents were Renee James, who heads Intel's software business; Brian Krzanich, Intel's chief operating officer; and Chief Financial Officer Stacy Smith.

All three are "solid executives," said Raymond James analyst Hans Mosesmann in a note to his clients. But he said none of them appear to have the background needed to help Intel going forward, adding, "our bet is that Intel goes outside for its new CEO."

Based on his conversations with Intel sources, technology analyst Patrick Moorhead of Moor Insights & Strategy agreed that Otellini's decision to step down was his own and that he probably "reached a point in his life where he just wanted to do something different."

But Moorhead also suspects Intel may be inclined to hire a CEO from outside, especially "somebody with a pedigree in a large company who understands how to move a major ship and move it along quickly." That's because he said Intel faces one of its biggest challenges since being founded in 1968.

One such challenge occurred in the late 1980s when it was battling intense competition from Japanese companies and decided to shift from making memory chips to brainy microprocessors. Another happened in 1994, when Intel revealed an embarrassing flaw in its Pentium processor. And a few years ago, it had to play catch-up when Advanced Micro Devices of Sunnyvale beat it to the market with a 64-bit chip.

Now Intel, which provides more than 80 percent of the microprocessors used in personal computers, is struggling to branch out into the smartphone and tablet market, which mostly use more power-efficient chips made by companies licensing a design from British firm ARM Holdings. Some analysts have put Intel's share at less than one percent in those mobile devices.

But while it may make sense for Intel to continue trying to get its chips into tablets, J.P. Morgan analyst Christopher Danely believes it should stop trying to expand into smartphones, software and some other new markets. Contending the company too often has failed trying to expand into other businesses, he said it should stick with the PC business now because "that's the only thing these guys can do well."

Mercury News researcher Leigh Poitinger contributed to this report. Contact Steve Johnson at 408-920-5043. Follow him at Twitter.com/steveatmercnews.

Intel's five CEOs

Paul S. Otellini, joined Intel in 1974, became CEO in May 2005 and plans to retire in May at 62.
Craig R. Barrett, joined Intel in 1974, was CEO from May 1998 to May 2005, and retired at 65.
Andrew S. Grove, joined Intel in 1968, was CEO from April 1987 to May 1998, and retired at 61.
Gordon E. Moore, co-founded Intel in 1968, was CEO from April 1975 to April 1987, and retired at 58.
Robert N. Noyce, co-founded Intel in 1968, was CEO from July 1968 to April 1975, and retired at 47.