FTC probes Chips, Intel deal

Chips and Technologies said it received a request from the FTC yesterday for "additional information in connection with the previously announced $17.50 per-share cash tender offer by Intel's subsidiary, Intel Enterprise Corporation."

There has been concern at certain graphics chip manufacturers in Silicon Valley that Intel, through the purchase of Chips and Technologies, may be setting itself up to be a dominant player in the graphics chip business, one of the last major PC chip markets that Intel has yet to control.

Apprehension about the deal doesn't revolve so much around current market conditions--Chips and Technologies is only one company in a crowded, competitive field--as it turns on what happens after Intel enters the graphics market. Historically, the company has used its huge influence in semiconductors to lift sales in new operations.

Intel, for instance, entered the field of chipsets only a few years ago. Then, motherboards with Intel processors sold with a variety of chipset brands.

Now, the Intel brand chipsets has an "attach rate" of 100 percent, points out Ashok Kumar, an analyst with Southcoast Capital. In other words, every time an Intel processor is sold, an Intel chipset goes with it. Other chipset vendors have been relegated to the 15 percent of the marketplace that is divided up among the alternative processor vendors.

"With graphics, you could hit a 50 percent attach rate in a couple of years," Kumar mused.

Other analysts agree. "Potentially they're an extremely powerful force in the graphics chip market," said Michael Slater, publisher of the Microprocessor Report. Like Mr. Kumar, he believes that Intel has the potential to eventually dominate graphics chips as it now dominates the chipset business. Particularly because Intel is the premier chip manufacturer in the world, a distinct advantage as these 3D chips become increasingly complex. "It will require advanced [production] technology. This will be an advantage," he said.

Intel is also coming out with its own 3D graphics processor, the 740, later this year, said analysts, which will increase the company's saturation.

Chips and Technologies has been informed that Intel received a similar request from the FTC. This "second request" extends the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, "during which the FTC is permitted to review the transaction until 10 calendar days after Intel has complied substantially with the information request," according to the Chips and Technologies release.

Second requests for information under the Hart-Scott-Rodino act occur less than 10 percent of the time, according to Bonnie Jansen, a spokeswoman for the FTC. "It signals a closer look. The agency wants to see whether it [the merger or acquisition] would substantially reduce competition in one or more markets," she said.

Under FTC regulations, parties to a merger or acquisition that amounts to more than $15 million must submit a first round of disclosures to the FTC prior to the merger announcement. The FTC and Justice Department then have 30 days to determine which agency will have jurisdiction over the investigation and whether a second request is needed. If a second request is made, the clock governing an agency's power to block or modify the merger stops.

Once the second request is completed, the agency then has 20 days to determine whether to block, modify, or allow the transaction.

The FTC itself cannot confirm whether a second request has been filed, said Jansen. However, both Intel and Chips and Technologies must disclose the fact of the investigation if they want to consummate the transaction. Both, of course, did that.

Although second requests occur when competition could be substantially impaired, Carl Johnson, president of Infrastructure, said that the merger does not appear to give Intel or Chips and Technologies a current monopoly in graphics accelerator.

Chips has close to 50 percent of the market for notebook accelerators, he said, but is a more marginal player in desktops. "Chips has a very large market share, but you've got S3, Cirrus," he noted.

Intel, he added, may have bought Chips because of Wall Street's recent disinterest in graphics controllers. "Here was a stock that collapsed," he said. At the same time, Intel has made no secret of its plans to make complex graphics an integral part of computing.

Chips and Technologies added: "Chips intends to comply with the request, and understands that Intel likewise intends to comply. Chips also understands that Intel is reviewing the request and is not yet in a position to determine the date to which it will extend the tender offer."

Intel is an investor in CNET: The Computer Network.