January 23, 2008 2:14 pm

IBM, Advanced Micro Devices, could set more formal chip ties, with merger possible, sources say

This article is provided to FT.com readers by mergermarket—a news service focused on providing actionable, origination intelligence to M&A professionals. www.mergermarket.com
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Advanced Micro Devices and IBM may establish a more formal semiconductor tie-up than their current partnership, specualted industry sources and analysts in conversations with mergermarket. A deal could see IBM’s microelectronics division merge with AMD at some point, possibly in the near term, said the sources.

Both listed AMD, based in Sunnyvale, California, and IBM, of Armonk, New York, are scheduled to report fourth-quarter results after Thursday’s US market close. While their respective executives are expected to be asked about their ties, neither company is expected to announce a more formal tie-up yet. An IBM takeover of AMD or a joint-venture company now might make sense, the sources said, because of an industry slowdown, which would better prepare any new operation for the eventual recovery.

An IBM Microelectronics/AMD deal would foster IBM’s continued move into technology services and away from hardware, while allowing it to retain hands-on management of a vital part of the computer industry, especially as chipmakers move to nanotechnology, said the sources. For AMD, which has not reported a quarterly profit since mid-2006, the move would be a big vote of confidence, the industry sources added.

“We blew it,” AMD CEO Hector Ruiz said last month when he met investors just after the company announced further delays in its latest Barcelona microprocessors designed to battle listed Intel’s leading Core 2Duo line. After battling Intel to as much as 40% of the market for chips in PCs and servers, AMD’s share fell back to about 25% last quarter, estimated market researcher IDC.

AMD, which reported cash and securities around USD 1.53bn in the third quarter, took in an additional USD 622m in November from Abu Dhabi’s state-owned Mubadala Development, which translated into an 8.1% equity stake. Not long after AMD was founded in 1969, it sold a 20% stake to Germany’s listed Siemens, which was long divested.

IBM, which reported USD 13.8bn in cash and investments in the third quarter, has long used its microelectronics division as an in-house source as well as direct supplier of chips to industry customers like listed Dell under long-term contracts. In the early part of the PC revolution, IBM held a minority stake in Intel as a means to assure supply, but that stake was sold in the 1990s.

AMD and IBM, though, have been technology partners for the past several years and are jointly completing a USD 3.2bn chip plant in Malta, New York, with a USD 900m subsidy from New York State. AMD, which completed a USD 3bn plant in Germany in 2006 and has an investment in Singapore’s listed Chartered Semiconductor, has looked to the plant as a technology refreshment.

IBM, with a market capitalization of USD 140.5bn, has recently been buying services and software companies and expects to complete its USD 4.9bn takeover of Canada’s listed Cognos this quarter. It has divested all but a small stake in China’s listed Lenovo, which bought its PC business; printers, Federal Systems and other hardware lines starting as early as 1990, but accelerating after its near-bankruptcy in 1992 and turnaround led by former CEO Louis Gerstner. Current CEO Samuel Palmisano, who succeeded him in 2002, has continued the strategy.

IBM no longer breaks out its microelectronics revenue but includes it in its systems and technology segment, which had nine-month revenue of USD 14.59bn. By contrast, AMD had nine-month revenue of USD 4.24bn.

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