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Thursday, November 12, 2009

Intel to pay AMD $1.25 billion as companies end litigation war; Is it a new chip era?

Intel and AMD on Thursday said they will settle all legal disputes, including antitrust litigation, for $1.25 billion. AMD CEO Dirk Meyer said the settlement ushers in a “new era” in the chip industry. But Intel CEO Paul Otellini was a bit defiant in a conference call this morning, saying that there would be no changes to the company’s business practices because the company has not acted illegally - and added that the New York Attorney General’s complaint against Intel was also without merit.

Under the terms of the settlement, Intel will pay AMD $1.25 billion cash within 30 days. Among other key items (statement):

  • AMD and Intel both get patent rights in a cross-licensing pact;
  • Intel will give up any patent claims against AMD;
  • Intel will agree to adhere to business practice provisions;
  • And AMD drops all pending litigation against Intel.

Intel has been under fire from regulators in Europe over its alleged treatment of AMD.

The companies said in a joint statement that more details about the cross-licensing pact, a 5-year deal, and Intel’s business practice agreement will be revealed in filings with the Securities and Exchange Commission.

Other odds and ends worth noting:

  • The agreement allows Globalfoundries, AMD’s spin-off of its manufacturing unit, to proceed as an independent company. Globalfoundries can now go forward without being an AMD subsidiary.
  • The patent cross license will allow AMD to use multiple foundries.
  • In prepared remarks, Meyer said:

Today marks the beginning of a new era… one that confirms that the game has changed for AMD. It is an important milestone for us, for our customers, our partners, and most important – for consumers and businesses worldwide. In addition, it represents the culmination many years of litigation and regulatory engagement. And we are optimistic that it will usher a new era for our industry.

We look forward to healthy competition with the mutual respect one would expect between world-class competitors.

It remains to be seen if this settlement marks a new chip era, but the “healthy competition” Meyer refers to will determine AMD’s fate.

Intel said that it will take the $1.25 billion hit in the fourth quarter. Intel now expects spending in the quarter to be $4.2 billion, up from $2.9 billion. The company maintained its previous outlook, but did note that its tax rate will be 20 percent, down from 26 percent (statement).

Update: AMD’s legal, corporate and public affairs EVP Tom McCoy made the following remarks during a conference call:

For us, this has never been about money. It’s about the marketplace. There’s no correlation between the settlement amount and anything in the EU.

Intel will not be able to condition doing business with them on not doing business with us. They can’t use inducements in order to force exclusive dealing, to delay customers from using our products, delaying or prohibiting a company that’s advertising our products, withholding benefits from companies that are using our products…Intel has no obligation to help us. They do have an obligation not simply to do things that are designed to hurt us.

With this agreement, we are trying to reset the relationship between AMD and Intel. That relationship has been intense, emotional and at times acrimonious for many years…all too many years. There was a touchstone principle of our negotiations that we’re going to be fierce competitors…we didn’t want pressures to build up and wanted to have a healthy, normal relationship. You will see in the agreement thought-out procedures that we will…resolve our differences before spilling into the courts and into the public affairs domain. We’ll see how it will go, but this is a start.

McCoy also noted that there are still a few kinks to be worked out between AMD and Intel, but ensured that the general agreement would open dialogue for such changes to be made through regulatory agencies. He continued:

The key issue for us is the conditionality. Structures or inducements or the opposite of inducements that are provided to customers are conditional on whether and to what extent how customers can also deploy AMD technology. That is the key practice that has constrained our access to the marketplace, whether at the computer manufacturer level or the channel level.

President and CEO Dirk Meyer added the following:

The industry isn’t going to change like a light switch. The industry is an ecosystem…that’s been built up to think and operate over several years. It’s going to take a period of time for the market to operate in a particular fashion. Disagreement is a [start] to that.

The message is that there will be a new era of peace between Intel and AMD. For those of us following the industry for years, color me a touch skeptical on that one. AMD’s CMO Nigel Dessau had this to say in a blog post:

AMD and Intel have today signed a historic ‘peace-treaty’. I use the phrase carefully because to some extent that is what it is.

More importantly, Dessau outlined business practices that prohibit Intel from:

  • Offering inducements to customers in exchange for their agreement to buy all of their microprocessor needs from Intel, whether on a geographic, market segment, or any other basis.
  • Offering inducements to customers in exchange for their agreement to limit or delay their purchase of microprocessors from AMD, whether on a geographic, market segment, or any other basis.
  • Offering inducements to customers in exchange for their agreement to limit their engagement with AMD or their promotion or distribution of products containing AMD microprocessors, whether on a geographic, channel, market segment, or any other basis.
  • Offering inducements to customers in exchange for their agreement to abstain from or delay their participation in AMD product launches, announcements, advertising, or other promotional activities.
  • Offering inducements to customers or others to delay or forebear in the development or release of computer systems or platforms containing AMD microprocessors, whether on a geographic, market segment, or any other basis.
  • Offering inducements to retailers or distributors to limit or delay their purchase or distribution of computer systems or platforms containing AMD microprocessors, whether on a geographic, market segment, or any other basis.
  • Withholding any benefit or threatening retaliation against anyone for their refusal to enter into a prohibited arrangement such as the ones listed above.

Simply put, a lot of the settlement business practices take care of what had European regulators so wound up.

Intel remained utterly defiant during its conference call, and claimed no changes would be made to business practices because it never acted illegally in the first place.

Intel CEO Paul Otellini said the following:

Throughout this process we have not wavered in our convictions that Intel has operated within the law.

These cases can be extremely expensive and the cost of risk is high.

People can honestly disagree about business and marketing practices…we understand that others have a different perspective.

We continue to believe that we have not violated any laws in these areas, or regulations.

We won’t do things that we both agree are wrong.

From our side, we won’t do those things, we haven’t done those things, and there’s no difference going forward.

There are no changes to ‘Intel Inside’ with this agreement.

EVP and CAO Andy Bryant elaborated:

They believe we conduct business in certain ways that we don’t believe we do.

What we’ve really done is codify what we will and won’t do, mostly what we won’t do.

We’re going to try to establish quarterly meetings where we’ll try to air these things.

We have what we think is a very thorough ability to vet differences…and solve them as business people, as opposed to through the courts.

There are [remaining] issues around pricing that the regulators might want to talk about [with us].

There are no changes to pricing practices as a result of this contract. It’s against U.S. law for us to have any discussions about pricing.

Otellini had this to add in prepared remarks:

We strongly disagree with the New York attorney general’s case and believe the case is entirely without merit…it is unfortunate that the New York attorney general intentionally distorted the facts.

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