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DEC Sells Alpha?

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DEC to sell Alpha to Intel?

Digital in Talks With Intel on Alpha Chip
--- Accord Would Turn Over Technology and Settle Lawsuit for $1.5 Billion
---- By Jon G. Auerbach
Staff Reporter of The Wall Street Journal 

The Wall Street Journal via DowVision
6 Oct 8:00

Digital Equipment Corp. is in talks to turn over its flagship Alpha technology to Intel Corp. in exchange for more than $1.5 billion, in a pact that would settle an acrimonious patent fight, according to people familiar with the negotiations.

While a deal could still fall apart and would be subject to review by federal antitrust regulators, any settlement involving Alpha would transform Digital and bring a remarkable conclusion to the closely watched patent lawsuit in which Digital claimed Intel stole technology.

A spokesman for Intel, which is based in Santa Clara, Calif., declined to comment. Senior executives at Digital, which is based in Maynard, Mass. also declined to comment.

A settlement would potentially bolster Digital, freeing the nation's No. 4 computer maker of a significant investment drain, padding cash reserves that now total about $2 billion, and giving the company more leeway to sell computer systems based on any number of processors. Digital has stagnated during the latest high-tech boom, partly because Alpha has failed to take off as a viable processor for the corporate market.

But giving up on Alpha would be a blow to Digital Chief Executive Officer Robert B. Palmer, a semiconductor engineer who has championed the high-performance chip as the center of the company's turnaround strategy. Although Mr. Palmer has continued to push Alpha, some members of Digital's board believe that the flagging chip has been an albatross.

A settlement would free Intel of a protracted lawsuit with Digital and remove the risk of an adverse outcome from the litigation. The lawsuit, which accuses Intel of pilfering Alpha technology to build the Pentium line of processors, called into question the chip giant's technological superiority, and also raised antitrust questions that helped spur a Federal Trade Commission inquiry of Intel's business practices, announced earlier this month.

Having rights to the Alpha chip also would allow Intel to tap the chip's technology for use in its own next-generation chip. Under the terms of the settlement currently being discussed, Intel would be obligated to produce the Alpha chip for several years. However, Intel isn't required to put its marketing muscle behind computers that run on the chip.

The terms were were outlined in discussions between Mr. Palmer, the Digital chief executive, and Craig Barrett, Intel's chief operating officer, say people familiar with their talks. These people warn that the complicated settlement will likely need the blessing of lawyers and engineers from both companies.

One big potential hurdle to any settlement is approval from the FTC, because Intel's control of Digital's chip operations would boost its already tight grip on the market for processors.

But Digital, say people close to the company, believes it could get FTC clearance for the Alpha sale, perhaps by arguing that Alpha has insignificant market share. Digital could also show that it has tried unsuccessfully to find other partners for Alpha.

The complete financial terms of any settlement remained unclear, but would involve both immediate payments and long-term discounts for Digital on Intel chips. Under one scenario, Intel would buy Digital's Alpha manufacturing operations for $650 million, says one person in the Digital camp. On top of that, Intel would pay $200 million to license the right to use the microprocessor, which mainly runs corporate computers, this person says.

Digital also would get $100 million or more a year over a period of seven years in discounts on chip purchases from Intel, say people following the talks. These discounts would come from volume price reductions on both the Alpha and Merced chips.

If the settlement proceeds along the lines being discussed, it could amount to a lifeline for Alpha. Despite glowing technical reviews for its performance, Digital has failed to ignite industry interest in Alpha in the five years it's been on the market, mainly because software makers haven't written enough software for it and no other major computer maker has been a big buyer.

It's unclear whether a settlement would have any effect on Intel's long-term microprocessor strategy. Intel is developing its next-generation chip, code-named Merced, in collaboration with Digital rival HewlettPackard Co. It is expected to be available in 1999.

Digital insiders believe the sale of Alpha would rid it of a cash drain and allow the company to compete better in the computer market. These people believe having Alpha limits the company's ability to sell computers based on a variety of chips, including those from Intel.

Digital's total sales for the fiscal year ended June 30 fell more than 10% to $13.04 billion, roughly the same as its 1990 revenue figure.

Analysts believe Digital sold just 275,000 Alpha chips in 1996, which means the chip accounted for less than 1% of the entire market for RISC processors. Analysts estimate Digital's 1996 revenue from the Alpha chip at $4.6 billion. Industry officials estimate Digital spends between $150 million and $250 million each year to keep the chip factory operational.

Under the terms of the deal being discussed, Digital wouldn't get rid of all its semiconductor operations. Instead, Intel would buy "capacity" in Digital's chip facility in Hudson, Mass.

Digital would continue to use the plant to produce StrongARM, a low-voltage processor used to power such devices as "smart" cellular phones, and chips used in networking devices.

Lately, Digital has been trying to shake its image as a company centered around Alpha. It plans to launch a new advertising campaign today designed to cast the computer maker as a solutions provider for big companies, rather than a hardware vendor.

"Digital is more than any one technology," says Bruce L. Claflin, the company's head of sales and marketing. "We are more than an Alpha chip . . . That's the story we're trying to tell."