Intel Corp. and Digital Equipment Corp. said today that they have reached a 10-year agreement that included the US$700 million sale of DEC's semiconductor manufacturing operations to Intel, putting a quick end to potentially bruising litigation.
Analysts said it was a "face-saving" agreement that will benefit both companies.
"It's a net benefit for both companies," said C.B. Lee, an analyst with Sutro & Co. "It's a good compromise solution. The alternative is for both companies to enrich the lawyers."
Under terms of the deal, Intel will get a state-of-the-art semiconductor fabrication facility in Hudson, Massachusetts, as well as development operations in Jerusalem and Austin, Texas, for book value. The company will also serve as a foundry for DEC's 64-bit Alpha processor. DEC has committed to building systems based on Intel's new generation of 64-bit chips. Intel will make an unspecified payment described as "insignificant" to DEC as part of a cross licensing of patents between the two companies.
"With the addition of a state-of-the-art [facility], new revenue stream, and endorsement of future systems based on Intel's IA-64 family of processors, I think we've reached a very beneficial agreement for Intel," Intel president Craig Barrett said in a conference call with analysts and reporters.
In addition to receiving a $700 million payment from Intel, DEC will benefit from eliminating continuing expenses associated with maintaining and improving its fabrication facility and from the economies of scale that Intel enjoys. DEC will retain ownership of the Alpha processor and retain the design and support team.
"It's a much more efficient business model for us - one that does not require Digital to continue to make substantial and continued investments in semiconductor process development and manufacturing facilities," DEC chairman Robert B. Palmer said in the teleconference. "We will benefit from world-class economies of scale and their ability to implement leading-edge semiconductor technologies more rapidly than we can afford to do on our own."
The agreement will require government approval. Intel is currently under a broad investigation by the Federal Trade Commission into its business practices, but the company said it expects to win approval for the agreement with DEC. "We've structured this in a way that there is a minimal overlap in the products," said Tom Dunlap, Intel's vice president and general counsel. "Digital retains full rights to do their Alpha design and Alpha manufacturing if they want, so we think it should pass the government's review."
Last week, an analyst's report of an impending settlement between the two companies placed the value of the agreement at $1.6 billion and speculated half that amount would take the form of discounts to DEC. But Intel refused to expand on the terms of the deal beyond its official statement. "We wouldn't comment on any of our large OEMs with terms to price," said Intel spokesman Chuck Mulloy, speaking of DEC. "They will be on an equal footing. This is a $700 million deal as far as Intel is concerned." Intel did however say the that $700 million would be treated as a capital expense and not as a one-time charge on its books.
In May, DEC filed the lawsuit in federal court alleging Intel's Pentium line of chips infringed on 10 of DEC's patents. DEC has claimed that it approached Intel about a working together on the chip technology in 1990 and later offered to license the Alpha technology to Intel for use in improving the performance of its chips. DEC said Intel studied the chip, but decided not to go with it.
Intel fired back with a counterclaim that DEC had misappropriated trade secrets and that it had breached its contract with Intel relating to a joint research project. The company in August expanded its counterclaim to include allegations that DEC had infringed on 14 Intel patents.
Some of those infringement claims were broken off into a separate federal suit filed by Intel that same month. The dispute with DEC was seen as part of the impetus for the Federal Trade Commission to launch an investigation into Intel. Though some speculate that the agreement would quell concerns at the FTC, others said that the investigation is broader than the DEC case and should not stop the commission from proceeding.
Jonathan Joseph, an analyst with NationsBanc Montgomery Securities thinks the deal will benefit both companies, but doubts any serious long-term commitment to the Alpha chip. "This is a face-saving way to let the Alpha die," he said.