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DEC up due to proposed Intel deal

Investors bid up shares of Digital Equipment on rumors that Intel will buy out the company's Alpha chip technology--but some analysts cast doubt that a deal will go through.

Investors bid up shares of Digital Equipment (DEC) today on rumors of Intel's (INTC) buyout of the company's Alpha chip technology. But some analysts cast doubt that a deal will go through, and note that any affect on DEC?s long-term strategy would be minimal.

Intel already is facing an antitrust investigation by the Federal Trade Commission on another matter (See related story), and antitrust issues may pose a roadblock to the Digital Equipment deal as well. (Intel is an investor in CNET: The Computer Network)

Nonetheless, investors pushed Digital Equipment stock as high as 9.7 percent in morning trading before it ended the day at 48-3/4, up 4 points over Friday.

The Wall Street Journal reported today that discussions were underway for Intel to purchase the Alpha chip technology for $1.5 billion and produce the chips for several years. The deal would be part of a settlement in a suit Digital brought against Intel in May over allegations that the chip giant stole its technology for its own 64-bit technology, Merced, which is expected to ship in 1999.

Digital, which launched its Alpha chip almost five years ago to jump into the emerging 64-bit computing market, has been struggling to get customers to buy its workstations loaded with the Alpha technology, and also has been struggling to get computer equipment makers to purchase its Alpha chips for their own products.

The company had hoped the Alpha technology would be its next big winner, and would propel its stature back to that which the company held during 1970s with its Vax technology for workstations. But in building a chip plant to handle production, the technology has been a resource hog, analysts said.

According to the Journal, the proposed deal would have Intel producing the chips only for a finite number of years, with Digital able to buy the chips from Intel. Once Intel stops producing the chips, Digital would be left with few chip sources in the future. Mitsubishi is one of few companies that has a license from Digital to produce the chips.

"On the surface, it seems unlikely this would go through. Why would they sell their manufacturing capacity and technology to Intel, with only a several-year commitment to supply them the Alpha chips?" said Gary Helmig, an analyst with Soundview Financial. "If Digital doesn?t get its Alpha chips from Intel, it will have to find another supplier."

Digital currently uses about 70 percent of the Alpha chips it produces for its own line of computer systems. The remainder it sells to original equipment manufacturers, said Wendy Abramowitz, an analyst with Argus Research.

But Abramowitz argued that the limited nature of the Intel deal should not concern Digital for the moment. "If the business were sold, it would not be terribly significant because Digital could buy their chips from Intel and continue to produce their systems," Abramowitz said. "The biggest advantage would come from helping their cash flow. They wouldn?t have the capital expenditures [for manufacturing the Alpha chips and funding related research and development]."

The Alpha systems and sales on its chips generate about $4.6 billion for Digital, roughly a third of its $13 billion in sales for its 1997 fiscal year, said Michael Zimm, an analyst with Smith Barney.

"It has been an earnings and revenue contributor and out in front of the performance curve," Zimm said. "But the problem has been Digital?s lack of execution. The Alpha has been one of the biggest wasted opportunities we?ve seen in this sector for a long time."

Zimm added that Digital has failed to market the chip successfully or to convince customers that it is a viable solution on which to run their systems. He also noted that one of the largest obstacles Digital has faced with its customers is their lack of faith in the company?s long-term success.

"They need more customers willing to bet on the future of Digital, rather than so much the platform. It wasn?t all that long ago when Digital?s viability was in question," Zimm said. "I think they have stepped out of the woods on this one, but they still have to convince their customers."

Digital reported an 11 percent drop in fiscal 1997 revenues from the previous year. It posted a profit of $141 million.

Analysts note that if Digital were to sell its Alpha chip business, it may help the company's image by proving it is a multi-platform vendor, easing customer concerns that the company is locked into one or two types of platforms.

But does Intel really need the technology?

Analysts said such a purchase primarily would be aimed at settling the Digital lawsuit that hangs over Intel?s head and removing roadblocks to pushing out its Merced technology on schedule.

Antitrust issues, however, may loom. Intel is not currently in the RISC microprocessor business, given that Merced has not yet debuted. But such plans are in the works.

"Intel is not participating in that now," Abramowitz said, "but they are getting down that road."