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IBM may make AMD chips

The companies are said to be in negotiations on a deal that would have IBM building Intel-compatible chips according to designs specified by AMD.

Advanced Micro Devices is negotiating to have IBM manufacture its Intel-compatible microprocessors in a deal that, although far from certain, would help AMD make more processors as it struggles to solve lingering manufacturing problems.

The negotiations were first reported in Reuters. Other sources have confirmed the negotiations since that time.

This comes in the wake of rumors in recent months saying that IBM may buy part or all of AMD.

This is happening against a backdrop of supply problems at AMD. The Austin, Texas-based chip maker 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 manufacturers such as Acer and Digital Equipment.

A shift to IBM could not only boost production of the chip but, maybe more importantly, 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 would make sense, and others that believe that it makes little sense.

IBM not only has the manufacturing facilities to make the K6--or other future K series chips--it 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. Nexgen 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 would leave 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. "It doesn't make much sense to me."

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

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

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

According to a source familiar with the talks, IBM and AMD are in "early to mid-stage" negotiations for a deal that would have IBM building chips according to designs specified by AMD.