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AMD, IBM extend chip development deal

Chipmaker will pay Big Blue nearly $300 million, but move should help in competition with Intel.

Advanced Micro Devices and IBM will work together to devise chip-manufacturing technology for three additional years, a deal that will bring about a quarter of a billion to IBM over four years and give AMD access to cutting-edge chip inventions.

In December 2002, the two companies entered into a pact to develop technology for manufacturing microprocessors. That deal was slated to wind down at the end of 2005, but it will now last through December 2008, according to a document filed by AMD with the Securities and Exchange Commission this week.

Although the two companies are working jointly to develop manufacturing technology, IBM appears to be providing the bulk of the research. Between September 2004 and December 2008, AMD will likely pay IBM between $250 million and $280 million under the agreement.

The deal highlights how semiconductor manufacturers and designers are increasingly entering into alliances to survive. The tab for building chip-fabrication facilities comes to about $3 billion these days, making such an endeavor a risky proposition for all but a few companies. Also, the engineering complexities involved in designing chips often means outside researchers are required.

IBM for years has been at the forefront of chip research, pioneering techniques such as silicon-on-insulator, but it sells far fewer chips than companies like Intel. Two years ago, it began to more aggressively court customers for its technological breakthroughs, customers such as Sony, Nvidia and AMD. Still, IBM's semiconductor unit has found profits difficult to come by.

AMD derived early benefit from the deal when IBM helped unwind problems AMD was having putting silicon-on-insulator into its chips. The help cost AMD several million, however. Before entering the IBM deal, AMD had struck alliances with United Microelectronics and Motorola.

Additionally, the agreement allows AMD to use third-party foundries to make any of its 90-nanometer chips, which just came out, or 65-nanometer chips, due in 2006 or 2007, that rely on IBM's technology. AMD currently manufacturers all of its own processors but has periodically said it would consider working with foundries, which operate as factories for hire. IBM provides foundry services, but analysts say they are generally fairly expensive. Many companies that sign deals to develop technology with IBM eventually have the chips manufactured by others.

A foundry that could benefit from the deal is Singapore's Chartered Semiconductor, which struck a deal in 2002 that gives it access to IBM's manufacturing techniques.

The SEC filing said that the agreement was executed Sept. 15 but remains subject to approval by IBM's board of directors.