Tech Industry

IBM, AMD shake on chip deal

Advanced Micro Devices says it has entered an agreement to have IBM manufacture its Intel-compatible microprocessors.

Advanced Micro Devices (AMD) said today that it has entered an agreement to have IBM (IBM) manufacture its Intel-compatible microprocessors in a deal that may help AMD make more processors as it struggles to solve lingering manufacturing problems.

AMD said it has signed a two-year agreement with IBM that will augment production of AMD's K6 processor. AMD said IBM is expected to begin making the chips starting in the third quarter.

The negotiations were first reported by Reuters.

The K6 is on par with high-end Pentium and Pentium II processors in performance.

As previously reported by CNET's NEWS.COM, the deal comes in the wake of rumors in recent months that IBM may buy part or all of AMD.

A deal with IBM takes place against a backdrop of supply problems at AMD. The Sunnyvale, California-based chipmaker has been laboring for the last eight months to make its Intel-compatible K6 processors in the quantities that PC vendors demand. This in turn has prevented the company from taking market share away from Intel.

AMD recently landed a contract to supply microprocessors to Compaq, for instance, but had to cut off other customers as a result. It is also supplying processors to IBM's PC division as well as to such manufacturers as Acer and Digital Equipment.

A shift to IBM could not only boost production of the chip but, maybe more important, improve manufacturing efficiencies, referred to as chip "yields," also a thorn in AMD's side. If the companies hustled, IBM could conceivably start releasing AMD chips in six months.

Nonetheless, the deal has analysts split, with some stating that the deal made some sense, and others believing that it makes little sense. The analysts were contacted before the deal was announced.

IBM not only has the manufacturing facilities to make the K6--or other future K series chips--it also has a relatively tight association with the processor. IBM acted as the manufacturer of processors for NextGen, which is the progenitor of the K6 design. NextGen was acquired by AMD in early 1996.

IBM, in fact, has a license to make K6 processors, pointed out Dean McCarron, principal analyst at Mercury Research. IBM uses the K6 in certain Aptiva models and makes the packaging that surrounds the AMD processor core.

Further, IBM already makes chips for other Intel-compatible vendors, pointed out Mark Edelstone, semiconductor analyst at Morgan Stanley. IBM manufactures the 6X86 chip for Cyrix. But Cyrix is in the process of shifting its manufacturing to new parent company National Semiconductor.

"They would be a logical choice. They are a reasonably large [chip] supplier and have a propensity to manufacture for others," Edelstone added.

Still, such a shift leaves AMD with the question of what to do with its current manufacturing plants. The company has invested millions into its Austin plant and the to-be completed plant in Dresden, Germany.

"It implies that they are throwing in the towel on their own [manufacturing] processes. The K6 is closely linked with their own processes," said Ashok Kumor, semiconductor analyst with Piper Jaffray. "They should concentrate on filling that damn fab [in Austin] instead of trying to find someone else." Acquisition rumors have swirled for months, he said, adding that he did not put great stock in the rumors.

"AMD has a giant fab already," noted Linley Gwennap, editor-in-chief of The Microprocessor Report.

Currently, the exact status of AMD's yield problem is unclear. AMD has said it has cured some of its major manufacturing problems, McCarron said. Whether or not the yields are sufficient, however, will not be known until toward the end of March, both Edelstone and Kumar said.

Officially, AMD will discuss the yield situation when they report first quarter results on April 7, an AMD spokesman said.

Shares in AMD jumped 10 percent on heavy volume yesterday on talk the company was in negotiations with IBM.