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).
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.