Call it off: Intel, AMD settle feud with $1.25B payoff

November 12, 2009 – One of the most well-known rivalries in technology appears to have been put to rest — for now — with a joint agreement between Intel and AMD, resulting in a $1.25B payment from Intel, a promise by AMD to drop all global regulatory complaints and by Intel to "abide by a set of busines practice provisions," and a new five-year cross-licensing agreement.

"While the relationship between the two companies has been difficult in the past, this agreement ends the legal disputes and enables the companies to focus all of our efforts on product innovation and development," the two companies said in a joint statement.

Separate comments by AMD CEO Dirk Meyer spelled out the deal more fully for AMD:

– Intel promises to abide by "an important set of ground rules that we hope will define the path to a free and open market in the microprocessor industry." AMD loudly and frequently complained that Intel was unfairly leveraging relationships with OEMs (including some suspiciously persuasive tactics) to keep AMD products out of their pipelines.

– The new patent cross-licensing agreement "gives AMD broad rights and the freedom to operate a business utilizing multiple foundries." This is significant especially as AMD strives to further distinguish itself as separate from its former chip manufacturing business, since spun off into GlobalFoundries; no word, though, on details as to how far that extends to other manufacturers (e.g., TSMC, also a perceived Intel rival).

– Speaking of GlobalFoundries, the deal allows that firm to operate as an independent foundry company "without being a subsidiary."

Consensus seems to be (echoed by Intel top execs) that $1.25B is a big number, even for a company like Intel (whose 4Q spending will now top ~$4.2B), but the risks involved with taking the dispute with AMD to trial could have been far worse. And AMD could put the cash to very good use — specifically, perhaps, toward much of its debt coming due in 2010, for which it pays 6% interest (roughly $0.12 annual EPS), notes FBR Research’s Craig Berger. That’s on top of an expected $200M-$400M cash generation in 2010, and the company already is ~$500M above its current minimum desired cash balance of $1B, he writes in a research note.

Moreover, both companies were spending truckloads annually just on the ligitation alone; with the promised new era of balanced and fair competition based on product merits, presumably those funds will go toward products (current and development) rather than billable hours.

Wall Street watchers cited by MarketWatch offer split opinions. Baird analyst Tristan Gerra thinks the deal "reuces the defensibility of Intel’s market share." But Wells Fargo’s David Wong argues that market gives/takes between the two in the past have historically patterned after technology improvements, so not much should change.

And it’s to that final point, Berger says, that AMD might find itself having to be careful what it wished for. "Although this agreement may level the playing field slightly, ultimately OEM purchasing decisions come down to product price, performance, branding, customer preferences, and long-term relationships," writes . "To this point, AMD is two years behind Intel in ramping its process technologies" — though in AMD’s same-day analyst presentations it showed roadmaps with GlobalFoundries suggesting it "will close this gap meaningfully by 2011."


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