AMD and Intel Smoke the Peace Pipe

All's well that ends well. Computer chip champions Intel (Nasdaq: INTC  ) and Advanced Micro Devices (NYSE: AMD  ) have agreed to set aside their differences and make nice, and Intel's stock got a slight bump on the news.

Oh, and AMD took a 23% leap of joy. We AMD owners feel a little bit richer today.

What's going on?
The two companies settled the antitrust lawsuit that AMD filed against its bigger competitor in 2005, and they dropped any and all legal complaints against one another in courts and regulatory agencies worldwide. "This agreement ends the legal disputes and enables the companies to focus all of our efforts on product innovation and development," said the joint press release.

As part of the agreement, Intel is paying $1.25 billion to AMD. That's less than the $1.45 billion fine that the European Commission slapped on Intel over antitrust and anti-competition issues, but it's still a hefty chunk of change. For Intel, that's about 10% of the company's $12.9 billion in cash equivalents. It's a much bigger sum next to AMD's $1.5 billion cash balance, which excludes the $1 billion held by the separated GlobalFoundries chip manufacturing company. The payment could also take a big bite out of AMD's $3.5 billion long-term debt load (again, only for the chip design business; the foundry owes another $2 billion).

Mo' money
But that's not all. Indeed, AMD’s executive legal VP, Tom McCoy, told analysts and reporters that the cash payment wasn't a big deal. "For us, this has never been about the money," he said. "It is about the marketplace."

The settlement calls for a broad patent cross-licensing agreement that "covers all products." Intel has agreed to change its business practices, too: Contracts that limit how Intel's customers use AMD products are a big no-no now, whereas AMD and others have seen lots of that action in recent years. To recap, system builders like Hewlett-Packard (NYSE: HPQ  ) and Dell (Nasdaq: DELL  ) were allegedly pressured to sell only Intel-based computers or limit their AMD sales to some small percentage of revenues. They did this in return for Intel rebates that were said to be big enough to turn quarterly losses into profits. While the agreement doesn’t limit retroactive rebates, it appears Intel is taking strides to move away from the practices that put it in regulatory hot water.

On top of all that, the agreement removed some restrictions on AMD's license to make x86-compatible processors (the kind that can run Microsoft (Nasdaq: MSFT  ) Windows or the most common version of Linux). Now, Abu Dhabi investors can feel free to tear Global Foundries entirely out of AMD's hands and merge it with recently acquired Chartered Semiconductor Manufacturing (Nasdaq: CHRT  ) , for example. The separation of AMD's chip design church and the manufacturing state was the subject of Intel's own legal complaints against AMD.

Mysteries left unsolved
It remains unclear whether the new licenses would allow a company like IBM (NYSE: IBM  ) to buy AMD and crank out x86 chip designs under that much larger financial umbrella. I wouldn't be surprised to see that change-of-control clause stricken when we do get to see the legal documents, though.

I'm not saying that IBM necessarily wants to get back in the microprocessor game, particularly after selling the ancient PC division to Chinese Lenovo -- and AMD's balance sheet suddenly looks much healthier than what we're used to. Still, I think it's an important issue to think about, and a last-ditch exit ramp just in case AMD's future goes horribly wrong.

My Foolish takeaway
In the words of Tom McCoy, "Everybody is a winner here, including Intel. They should be congratulated for really trying to put this behind them." McCoy characterized the settlement as a "pivot from war to peace," and hoped that a new era of mutual respect would "make everyone proud of this industry."

Kumbaya to you too, Tom. But seriously, this is good news for everyone involved. The cash portion of the settlement is obviously very helpful to the struggling underdog. Putting an absolute figure on the damages to AMD and closing the legal book removes storm clouds of uncertainty for Intel. And a more straightforward and open competitive environment should be good for business and innovation in the processor space in general. Intel is a giant in the field, a trailblazer that sets the standards for everyone else. Now nobody can point to Intel's aggressive business practices and think that makes it OK.

Swell move all around, then. Does this news make you want to buy semiconductor stocks today? Discuss in the comments below.

Fool contributor Anders Bylund owns shares in AMD, but he holds no other position in any of the companies discussed here. Dell, Intel, and Microsoft are Motley Fool Inside Value recommendations. Motley Fool Options has recommended a diagonal call on Microsoft. Try any of our Foolish newsletters today, free for 30 days. You can check out Anders' holdings and a concise bio if you like, and The Motley Fool is investors writing for investors.


Read/Post Comments (13) | Recommend This Article (16)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On November 12, 2009, at 4:48 PM, Celtics17 wrote:

    Pretty depressing to see a successful, innovative company targeted and punished by government, while inferior companies get rewarded. To see our government join forces with the EU to stifle competition is disheartening to say the least.

    2010 mid term elections can't come soon enough. Hope it's not too late by then.

  • Report this Comment On November 12, 2009, at 6:22 PM, CityWealth wrote:

    "Pretty depressing to see a successful, innovative company targeted and punished by government, while inferior companies get rewarded"

    Ummm what? The government is not the problem here, Intels monopolistic and anti competitive behaviour is.

  • Report this Comment On November 12, 2009, at 7:14 PM, kennyboy81 wrote:

    Yeah, put the Republicans back in. They did such a good job managing the economy the previous 8 years. Less regulation is the key. Just ask Wall Street.

  • Report this Comment On November 12, 2009, at 7:46 PM, ozzfan1317 wrote:

    kennyboy81 ..Lol..You summed it up...Maybe we could just let businesses do whatever they want I'm sure we could trust them to be fair about it..;)

  • Report this Comment On November 12, 2009, at 7:48 PM, ozzfan1317 wrote:

    kennyboy81 ..Lol..You summed it up...Maybe we could just let businesses do whatever they want I'm sure we could trust them to be fair about it..;)

  • Report this Comment On November 12, 2009, at 9:01 PM, murthg1 wrote:

    Seriously, kennyboy81? As a capitalist, I believe in free markets, not monopolies.

  • Report this Comment On November 12, 2009, at 9:13 PM, murthg1 wrote:

    Good for AMD and good for consumers. It's time real capitalism with a real free market was defended with antitrust laws.

  • Report this Comment On November 12, 2009, at 9:46 PM, libra4us wrote:

    For some people, some depressing medicine is needed.

    Let's see which company is the innovator:

    1. AMD invented 64-bit x86 CPUs, then Intel followed.

    2. AMD started dual-core CPUs, then Intel followed.

    3. AMD had a memory controller integrated on chip with CPU, then Intel followed after being in denial for some time.

    Let's see how Intel educated consumers:

    1. Promoting a new 64-bit CPU that isn't compatible with x86.

    2. Telling consumers that they don't need 64-bit CPUs.

    3. Telling consumers that they don't need dual-core CPUs.

    4. Telling consumers that an integrated on-chip memory controller won't make any difference in performance.

    Just the settlement between two companies isn't enough. Look forward to seeing punishments from various time-consuming legal systems for the bully's REPEATED ANTI-COMPETITIVE BEHAVIOR. The bully did it once at 80386 generation in 80's in a different way.

  • Report this Comment On November 13, 2009, at 7:06 AM, plange01 wrote:

    intel simply bribed amd..

  • Report this Comment On November 13, 2009, at 9:41 AM, mikecart1 wrote:

    Intel should buy AMD outright for the LULZ! hahah

  • Report this Comment On November 13, 2009, at 3:20 PM, meditateobhr wrote:

    Respond to libra4us

    You only mentioned one of the two most critical tec hnical contributions from AMD. Of course #1 is x64 compatibility, the other is DDR vs. Rambus memory which really drove down the memory cost and better performance.

    But AMD also commit some big mistakes by jumping on SOI starting material and claimed it is the root cause of their power saving during the P4 system days. Core 2 came out proved that wrong. SOI wafers are at least $200 more expensive than normal single crystal Si 12" wafers. I sincerely hope that AMD can recognize this and follow Intel on this issue.

    If HP is not complaining about their Itanium server, nothing wrong with Intel's original x64 architect. AMD was contemplating similar thing after the X64 success.

    For 99.995% of average PC users, integrated memory system has little impact to the system performance. Need to give Intel some credit for offering superior products.

    Of course it is a different story in the server and super computing world. However, Intel's CPU still occupied more than 2 to 1 ratio for top 500 super computers. Again need to give Intel some credits for maintaining such dominant presence in the super computing world and I do not think it has anything to do with the monopoly practice.

  • Report this Comment On November 13, 2009, at 10:51 PM, libra4us wrote:

    Response to meditateobhr:

    I agree with you. The reason I picked those three is to respond to one reader's comment sided too much to Intel. I was a microprocessor chip designer and has no ieterest in taking side. Both comapnies have very capable engineers, but Intel has dirty business executives who think they are above the law, or there is no law and no government at all!

    This case is not about Intel's current products but killing AMD's critical opportunity with 64-bit x86!

    Ask Intel's executives to answer the following questions and educate us about how rebate and kickback work:

    Has they seen rebates or kickbacks from auto or cell phone companies conditioned with not buying at all or limited buying competitors' products?

    Has they seen a consumer rebate conditioned with not buying at all or limited buying competitors' products?

    All consumer rebates I have seen just require the proof of purchase and the dated receipt.

    Now Intel starts educating its employees how to write emails to each other to make it even more difficult to discover any dirty deals it may have in the future. Educating Intel’s and PC makers’ CEOs how to write emails to each other is particularly important!

  • Report this Comment On November 13, 2009, at 11:21 PM, libra4us wrote:

    Response to meditateobhr:

    I agree with you. The reason I choose those three quick examples for AMD is to respond to a reader's comment. Very often people get too emotion and take side, for what purpose? I was a microprocessor chip engineer and have no interest in taking side, especially having done enough designs. Both companies have their shares of innovation, have very capable engineers, but Intel has dirty executives doing dirty business. The #1 company should be a role model for the industry.

    Let's ask Intel's executives answer the following questions and educate us how rebates and kickbacks work:

    Has they seen rebates or kickbacks from auto or cell phone companies conditioned with not buying at all or limited buying competitors' products?

    Has they seen a consumer rebate conditioned with not buying at all or limited buying competitors' products?

    All consumer rebates I have seen just require the proof of purchase and the dated receipt. Please ask him to educate us.

    Now Intel starts educating its employees how to write emails to each other to make it even more difficult to discover any dirty deals it may have in the future. Educating Intel’s and PC makers’ CEOs how to write emails to each other is particularly important!

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