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FTC won't block Intel merger

The FTC will not block Intel's $420 million acquisition of Chips & Technologies, but will continue its investigation into the merger.

The Federal Trade Commission will not block Intel's (INTC) $420 million acquisition of Chips & Technologies (CHPS), the government agency said today.

Nevertheless, the commission said it still plans to continue its investigation of the acquisition as part of its broader inquiry into antitrust concerns involving Intel. At the same time, the chip giant is facing an FTC investigation into its acquisition of Digital Equipment's manufacturing operations.

"Because we have concerns about the impact of this [C&T] transaction on competition in markets for certain computer components, we have chosen to continue the investigation into the lawfulness of the acquisition," the FTC stated in a press release.

Should the FTC later determine that some type of enforcement action is necessary, it could then ask Intel to divest of Chips and Technologies.

"It's an unusual move by the agency," said Howard Morse, former assistant director of the FTC's Bureau of Competition, the division responsible for antitrust enforcement in the computer industry. "They usually either challenge a merger or let it go through. This creates uncertainty for the transaction in the long run, and suggests that the agency has serious antitrust concerns with the effect of Intel's growing dominance over the motherboard."

Morse, who recently left the FTC to join the Washington, D.C., law firm of Drinker, Biddle & Reath, said the agency's statement indicates an increased likelihood that it will take action in its broader monopoly investigation of Intel.

"The agency went out of their way to issue statements to show they have concerns about competition," Morse said. "That is a very unusual move."

Chuck Mulloy, and Intel spokesman, said that the FTC decided that there was not enough evidence to persuade a judge to grant a preliminary injunction and that Intel therefore planned to move forward with the deal. He said he could not comment on what C&T's immediate plans will be within Intel, but said the original motivation for the transaction has not changed.

"We will integrate C&T into our business. There are no layoffs planned at all," he said. "We said the motivation was to leverage C&T's expertise in the graphics area for mobile computing. We want to move the mobile computing platform forward. That is where we will be focused going forward."

Mulloy added that the FTC's decision to continue investigating the acquisition as part of its broader investigation should not cause any delay in the closing of the merger.

The number of shares tendered through Intel's offer to C&T will determine how long it takes to close this deal, Mulloy noted. If Intel gets 90 percent of C&T's shares, it will be a short-form merger and the deal should be closed before the end of the month, he said. However, if Intel gets between 50 percent and 90 percent of C&T's shares, the merger will require shareholder approval.

The FTC would not comment on the investigation beyond its official statement.

Shares of Chips and Technology rose to as high as 17-5/8 in morning trading, up from the stock's close of 16-1/8 yesterday. Under the terms of the deal with Intel, the chip giant will pay 17-1/2 for every share of the graphics chip maker it receives.

C&T's shares had been weak during recent months, as the acquisition deal was postponed five times. The stock sank down to 14 a share last month, after rallying to 17-1/8 upon Intel's initial offer to C&T in late July of 1997.

As a result of the tender offer, the FTC launched an investigation into Intel's business practices. Specifically, the FTC was seeking information on whether Intel has violated antitrust statutes by attempting to monopolize markets through allegedly anticompetitive behavior.

The offer to buy the shares was originally set to terminate on October 6.

Intel, C&T, and Real3D, a Lockheed Martin company, already have been jointly developing Intel's upcoming 740 graphics chip for desktop PCs and workstations.

Intel's purchase of Chips and Technologies heralds an aggressive foray into the graphics chip business. In short, if the merger is executed successfully, Intel could hold sway over all the main circuitry in any PC.

Officials from C&T could not be reached for comment.

Morse said the FTC's decision on the C&T merger does not necessarily have any correlation with a decision on its purchase of Digital's manufacturing plant in a $700 million deal.

"I don't know what this tells us about the Digital transaction," Morse said. "It confirms that the agency has concerns with Intel's market power and that, ultimately, there will be some enforcement action. But whether the agency will challenge the Digital transaction, one can't read from the agency's statement."

He added that the C&T acquisition was a vertical merger proposal, in which Intel would use C&T's graphic's chips in its motherboard in order to gain entry into a new market. In the Digital deal, however, the deal is a horizontal one. Intel plans to ship the Merced chip, which is expected to compete directly with Digital's Alpha chip currently out on the market. The proposed manufacturing deal with Digital may result in Intel absorbing the Alpha technology and reducing competition in the marketplace.

[Intel is an investor in CNET: The Computer Network.]