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The hammer falls – Intel hits AMD and Nvidia – who’s next?

Posted: 03.18.09

Intel hits AMD and Nvidia

64-bit x86 could be withdrawn - this is MAD.

Remember all those clever comments about how Intel is a hammer so everything looks like a nail to them? Well the hammer is smacking its competitors.

First up was VIA who just threw in the towel and gave up on the chipset business. Next was Nvidia who were told they couldn't interface to QPI – which would shut them out of the chipset biz. Today's nail was AMD and they were told they've got 60 days to get out of Dodge and to stop building x86 parts.

The setup

In a new securities filing, AMD says that Intel claims AMD breached its 2001 cross-license agreement. This threatens AMD's ability to make x86 chips, which includes AMD’s PC and server CPUs (but not its ATI graphics chips.) AMD's cross licenses to the x86 architecture (from Intel) is supposed to be kept secret.

AMD assured investors that the creation of GlobalFoundries (the deal closed March 2) would not affect its x86 license. Intel apparently disagrees, and according to AMD’s filing: “… alleges that the Company [AMD] has committed a material breach of the Cross License through the creation of the Company’s GlobalFoundries joint venture and purports to terminate the Company’s rights and licenses under the Cross License in 60 days if the alleged breach has not been corrected.”

Intel says the company has notified AMD that it believes AMD has breached a 2001 patent cross-license agreement with Intel. Intel believes that GlobalFoundries is not a subsidiary under terms of the agreement and is therefore not licensed under the 2001 patent cross-license agreement. Intel also said the structure of the deal between AMD and ATIC breaches a confidential portion of that agreement. Intel has asked AMD to make the relevant portion of the agreement public, but so far AMD has declined to do so. Intel's position is that AMD's breach could result in the loss of licenses and rights granted to AMD by Intel under the agreement.

So AMD says it has 50 percent economic ownership and 50 percent management control (voting rights) in GlobalFoundries; and on a fully-converted common stock basis (ATIC holds convertible notes, but they are not convertible at this time), AMD owns 34.2 percent of GlobalFoundries. So, according to AMD, by definition, GlobalFoundries is indeed a subsidiary in the Cross License Agreement.

AMD said in its statement: "Intel's purported attempt to terminate the company's rights and licenses under the cross license itself constitutes a material breach of the cross license by Intel, which gives the company the right to terminate Intel's rights and licenses under the cross license agreement while retaining the company's rights and licenses under the cross license agreement."

Talking to the parties

I spoke with Dirk Meyer, president of AMD a little about the cross license and anti-trust case last week. Then Monday I spoke with Harry Wolin, AMD's chief council, and then I called Chuck Mulloy, Intel's senior manager corporate and legal affairs. They were pretty much in sync on the facts and differed as you might expect on the interpretation – and hence the need for a mediator.

Are they MAD?

The “deal” is a patent CROSS license. AMD gets rights to use the x86 architecture, and Intel gets AMD's 64-bit extensions to the X86. So if Intel slams AMD, AMD will pull the plug on all of Intel's non Itanium 64 bit processors. If Intel shuts down AMD and then AMD shuts down a hunk of Intel, that's Mutual Assured Destruction – MAD.

Well no one is going to shut down anyone. What could happen is if the alleged breach isn't resolved with 60 days, then AMD and/or Intel could claim the cross license is null and void. Then, any parts that either company shipped wouldn't be licensed and theoretically they could sue each for patent violations.

But we all know how fast the courts move – something to do with lawyer's annuity and retirement programs. So presumably if this did go down badly, it wouldn't be resolved before the anti-trust settlement, and then presumably it could be a don't care – although I doubt Intel would agree with that.

Nuances and speculation

AMD says this action by Intel is a distraction to draw attention and resources away from the anti-trust suits. Furthermore AMD says this is designed to cause havoc in the market, scare customers, distract the press, and as such represents a breach of duty of good faith, and is interfering with AMD's ability to do business. Intel says nothing of the kind – this is a serious breach and that AMD is putting Intel technology into the hands of a non-licensed third party – GlobalFoundries.

AMD says the Cross License agreement states that a subsidiary is one in which a party owns or controls 50 percent of outstanding shares or voting rights; as well as owns at least 30 percent of the profit interest of the entity,; therefore, the GlobalFoundries is a subsidiary, and by Intel's own terms and conditions for such, meets the test for that. Those tests are that AMD have at least 50% ownership and voting rights, which it does, that it has invested 50% of the capital or assets, which it has, and that it owns at least 30% of the profit interest (on a fully diluted basis), which it says it will.

Intel says, not so fast you sharp-penciled-former-banking-accountant, you've not taking into consideration the net balance sheet which has to include the $1.1 billion debt reduction AMD got from the formation GlobalFoundries. AMD's contribution of manufacturing assets and liabilities,was valued at $1.8 billion; ATIC's contribution was $1.4 billion in new capital; and approximately $1.1 billion of debt assumed by The Foundry Company from AMD. Intel's math goes like this: AMD put in $1.8 billion in contribution (fab technology, etc.) and got back $1.1billion so AMD's net investment is $0.7b and that's less than ATIC's $1.4b.

Intel also thinks the $125 million Mubadala invested in AMD should also be counted.

AMD of course argues that you can’t subtract the $1.1B debt from AMD’s $1.8B (as a benefit to AMD). AMD transferred the debt to the sub, it didn’t go away, it’s not paid off (that’s another reason, says AMD, why GF is truly a sub!). AMD, as a 50% owner in GF, is still very much on the hook as a co-guarantor for those loans/debt. And, AMD says the Mubadala investment in AMD has no direct financial relationship with GF — because of the timing. AMD's strategic partner Mubadala increased their stake in AMD with a stock purchase. (Mubadala happened to introduce AMD to ATIC, but ATIC made the investment in GF.) Also, the actual investment by Mubadala as of the close was $125M (not $314B, which was an estimate from last year when the deal was announced — the final closing numbers were very different.)

Intel points out that GF has the right to approve any discussion AMD has with Intel — even the anti-trust suit — that's a pretty powerful subsidiary says Intel — sounds more like a controlling partner
Intel is also complaining that AMD is holding secret certain parts of the cross license, and wants AMD to make those items public.

AMD says Intel fought for a protective order for the evidence in the U.S.anti-trust case to hide documents from public scrutiny and so if Intel will release the restriction on that case, AMD says so will they with the cross-license.

What do we think?

Regardless of the legal definitions and interpretations, Intel does not want its technology getting into the hands (or chips) of anyone GlobalFoundries signs up as a customer – Intel does not want GlobalFoundries to become a patent laundry on Intel IP.

I just can't believe that is AMD's or GlobalFoundries' intent, but intent is difficult to spell out in a contract, and I can't blame Intel for being a little paranoid (forget the book.)

Hopefully the mediator can get both parties POV across to each other and come up with an agreement that protects Intel's IP, while giving AMD access to that IP. It's unlikely AMD and Intel could come to terms on a new license given their current litigious condition (i.e., the anti-trust cases) so this has to get fixed. The flip side is, Intel can't be positioned as being a monopolists by using their x86 licensing terms as weapon, the FTC and courts frown on that kind of behavior. Clearly there's room, and need for compromise here.

The outcome of this dispute will have precedent setting implecations for Nvidia's disagreement with Intel over its interface license, and could effect VIA as well.