Under the pact, IBM plans to use LSI's ZSP core as part of the custom chips it sells to big networking and wireless companies. The core should start showing up in wireless base stations and other equipment beginning early next year.
DSPs (digital signal processors) refine digital audio and video data and are key elements in cell phones and a host of digital gear from networking products to digital cameras and MP3 players.
In making the deal, the two companies show a willingness to work with a competitor to get something they want. IBM gets what it believes is a key technology for future networking gear, while Milpitas, Calif.-based LSI picks up a key customer for a chip architecture it hopes to make standard.
Still, even the parties involved admit it makes for strange bedfellows when fierce rivals strike a deal.
"Stranger things have happened, but certainly on the surface, it looks strange," said Duncan Needler, marketing manager of IBM's custom logic business.
What makes the deal attractive is both companies are trying to forge an alternative to the chip architecture of Texas Instruments, the industry leader in DSPs.
The deal also highlights IBM's unusual strategy to boost its chipmaking operation. While other big names, such as Lucent Technologies and Broadcom, have focused on buying start-ups, Armonk, N.Y.-based IBM has looked to a variety of alliances, minority investments and technology-swapping deals to boost its chipmaking operations.
"We've really found it's a way to accelerate our products into market," said IBM Vice President Chris King. "It certainly is a different path than acquisitions."
In the past year, IBM has structured a number of these deals.
In many cases, the start-ups want access to IBM's chipmaking facilities and advanced-manufacturing techniques, such as copper wiring and silicon-on-insulator chips.
Networking chipmaker Multilink Technology was attracted by IBM's silicon germanium manufacturing process, which is ideal for the super-fast chips the company designs. Although IBM had the technology, King said the company lacked the product knowledge Multilink had. Now the two companies have a joint design center developing products that both companies are able to market.
In the case of network processor maker EZchip Technologies, IBM made a financial commitment last November, giving the start-up access to IBM's embedded memory technology in exchange for access to some of EZchip's intellectual property.
Though many deals focus on IBM acting as a manufacturer, the tables were turned when the company struck a deal the same month with Kymata, a Scottish maker of optical networking chips. In that case, IBM had a unique silicon-oxy-nitride manufacturing process but needed access to Kymata's manufacturing capacity. IBM also took an equity stake in Kymata.
"Every deal is a little different," King said.
Analyst Richard Doherty, of Seaford, N.Y-based Envisioneering Group, said the cumulative effect of the deals has been to give IBM an impressive platter of technology.
The portfolio of "IBM is a Chinese menu," he said. "You can get just about anything you want."
Doherty said adding LSI's DSP core helps fill one of the few areas within IBM that wasn't particularly strong.
The deals not only give IBM needed technology, but start-ups have a perspective that big companies don't, King said.
"Talking to the start-ups is really where you get the headlights into where the industry is going," King said.
Doherty said managing such relationships is tough, but from what he hears, most companies walk out of meetings with IBM primarily concerned with how fast they can start working together.
"No one's ever accused IBM of not knowing how to conduct business," he said.
IBM said its deal making is already paying off, noting that its chip business was a key reason it was able to post better-than-expected fourth-quarter results.
Doherty said the company will continue to reap the fruit of such deals.
"Clearly, IBM keeps getting a larger and larger share of custom logic," he said.