Intel pays out $1.2 billion to chip maker rival

Intel is paying Silicon Valley rival Advanced Micro Devices (AMD) $1.25 billion (£749 million) to squash a legal battle over Intel's sales tactics, a rift that led to antitrust charges against Intel in several countries and was headed toward a costly and nasty trial next year.

The settlement announced Thursday between Intel and AMD - whose microprocessors serve as the brains for nearly all personal computers - doesn't let Intel off the hook. It still has to deal with the antitrust charges that AMD pressed governments to file.

The biggest case is in Europe, where regulators have fined Intel a record $1.45 billion (£869 million) over what they described as Intel's illegal tactics to bully PC makers into choosing Intel chips over AMD's. EU spokesman Jonathan Todd said that the European Commission "takes note" of Intel's settlement with AMD but that it does not change Intel's duty to comply with European antitrust law.

Intel is also fighting an $18.6 million (£11.1 million) fine in Korea and a federal lawsuit filed last week by New York Attorney General Andrew Cuomo, who accused Intel of abusing its dominance to "rule with an iron fist." The US Federal Trade Commission also is investigating.

The settlement does allow Intel to duck a trial set for March in Delaware over a federal lawsuit AMD filed in 2005.

"While it pains me to write a cheque at any time, in this case I think it was a practical settlement," Intel CEO Paul Otellini said on a call with analysts. "And it was a good compromise between the two companies. And in many ways it was a small multiple of the potential damages that could be awarded in a jury trial."

AMD shares soared $1.15, or 22 per cent, to $6.47 in afternoon trading. Intel shares fell 1 cent to $19.83.

The lawsuit reflected AMD's long-standing accusation that Intel has kept AMD's market share from rising no higher than about 20 per cent by threatening PC makers and offering financial incentives for avoiding AMD chips. AMD's lawsuit quotes one manager from Toshiba comparing Intel's incentives to "cocaine." It also cites executives from Gateway complaining that Intel's threats of retaliation for working with AMD beat the executives "into guacamole."

Intel has defended its practices, saying it simply offered rebates to big customers, which allowed them to pass lower PC prices on to consumers.

It's not clear how much of Intel's behavior will change under Thursday's deal. Intel agreed to "abide by a set of business practice provisions," and AMD said the changes resolve its concerns "to a great extent." But Intel says that as part of the deal it will refrain from giving financial incentives to companies that limit their use of AMD chips -- which the company had always said it wasn't doing anyway.

The settlement has precedent. In 1995 the companies, which are headquartered mere miles from each other, made peace over different issues. That deal gave AMD the right to keep producing chips based on a design known as the "x86 architecture," which both companies still use today.

A trial over the latest issues could have been dangerous for both companies.

Intel risked heavy penalties if it lost. A verdict for AMD also could have increased the momentum for cases like those that have come in Europe, New York and Korea.

Meanwhile, AMD, which is struggling to whittle $3.7 billion (£2.2 billion) in debt and pull off a major restructuring, could have found the trial prohibitively expensive. The companies have not said how much they have spent on legal fees related to the case, but it's easily in the tens of millions of dollars.

Intel also had a cudgel against AMD. AMD's restructuring has included the spinoff of its manufacturing arm to cut costs, a move that Intel says violated the x86 licensing agreement. AMD argued the spinoff didn't need a new license to make chips that incorporated Intel's technology, but Intel argued it did.

That spinoff is critical to AMD's turnaround after it lost billions while trying to compete dollar-for-dollar against Intel in developing advanced manufacturing techniques, a fight AMD ultimately conceded it couldn't win.

Under the terms of the new agreement, AMD and Intel entered into a new, five-year cross-licensing deal. Intel dropped claims that AMD breached the earlier agreement. And AMD is dropping all litigation against Intel and withdrawing its regulatory complaints worldwide.

"It is a pivot from war to peace," said Tom McCoy, AMD's top lawyer.

Intel said that with the $1.25 billion settlement, its spending in the current quarter will now be $4.2 billion (£2.5 billion) rather than the $2.9 billion (£1.7 billion) it had previously forecast. It also expects its tax rate to be 20 per cent rather than 26 per cent. All other expectations are unchanged, Intel said.