Analysts See Pluses for Both If Intel Gets Digital's Alpha

Both companies would benefit if Digital Equipment Corp. turned its Alpha RISC microprocessor over to Intel Corp., observers said in response to a newspaper report today.

Both companies would benefit if Digital Equipment Corp. turned its Alpha RISC microprocessor over to Intel Corp., observers said in response to a newspaper report today.

According to an article published in The Wall Street Journal, Digital is discussing selling Alpha technology to Intel Corp. for more than US$1.5 billion, which would cut short a patent battle between the two which has been festering since May. Intel officials did not respond to a request for comment, and a Digital spokesman said only that "We're not commenting on that story."

Selling Alpha makes sense for Digital, even though the technology is solid, according to analysts.

"Fundamentally, Digital is distracted by Alpha," said Rob Enderle, an analyst at Giga Information Group. "It's eating an exorbitant number of [Digital's] resources, in terms of management time and marketing dollars."

Several analysts noted that the costly nature of chip manufacture favors volume production, something that the demand for Alpha does not warrant.

"Digital Semiconductor is a losing operation, because of the small number of chips it produces and the high costs," said Chris Christiansen, an analyst with International Data Corp. in Framingham, Massachusetts.

"They have a choice -- try to slog it out with [other chipmakers] Intel and Sun [Microsystems Inc.] and IBM or try to redefine their core competencies," said Dave Vellante, also an analyst at IDC.

Analysts were united on what Digital's core competencies are.

"Digital's strengths have always been in systems delivery and systems report and making rather complex systems work," said Peter Christy, president of MicroDesign Resources, which publishes The Microprocessor Report. What customers really buy from Digital is their ability to solve complex business problems, and whether that solution involves an Intel CPU or a Digital CPU doesn't really matter, he said.

Giga's Enderle also singled out Digital's hardware as a core competency. Digital builds good laptops and desktops, and their "fault-tolerant servers are world class," Enderle said.

Reassigning Alpha's resources to other opportunities could help Digital add to this solid stable of staples, analysts said.

For example, Digital could focus on developing hardware-enhancing software and middleware, perhaps focused on a specific industry such as manufacturing, that would make Alpha servers run better than anyone, Vellante said. If Digital seeks out new opportunities like these, "I think their value proposition wouldn't really change that much," Vellante said. "There's no inherent benefit to buying the technology or making it."

Digital may also be getting out while the getting is good, given the looming specter of Merced, one analyst said.

"For those of us who have seen the Merced chip, we think it's a good thing [for Digital to sell Alpha], since they'd have to invest beyond their means" to make it competitive with Merced, Enderle said.

For Intel, acquiring Alpha could be a sensible way to cut short a potentially protracted legal entanglement, analysts said.

Intel would get "a very annoying and probably quite legitimate piece of litigation off the table that could inhibit the next generation of sales, code-named Merced," Christiansen said. With the settlement, Intel also eliminates a competitor and gains some really excellent technology in the bargain, he said.

Christy gave less credence to Digital's suit, but also characterized Intel as anxious to avoid lengthy litigation.

"Digital had no smoking gun on Intel," but trial outcomes are so uncertain that Intel probably wants to avoid that, Christy said.

Moreover, a settlement would bring Digital back into the Intel fold, a relationship which has suffered since the suit as evidenced by Digital's exploration of some opportunities with Advanced Micro Devices Inc., Enderle said.

As for the alleged $1.5 billion Alpha price tag, that is pocket money for giant Intel, analysts said.

"A billion and a half dollars, especially if it's pretax, is around two weeks of Intel's profits," Christy said.

Digital sued Intel in May for infringing on 10 Alpha-related patents to build Intel's Pentium line of chips. Several weeks later Intel filed its own suit against Digital over alleged misuse of technical information Digital had obtained through a nondisclosure agreement with Intel.

U.S. Federal Trade Commission (FTC) approval would be needed before Intel could acquire Alpha, which could be hard to win given Intel's weighty presence in the chip market, the Journal said. On the other hand, Digital could attempt to sway the FTC by showing that Alpha's market share is quite small, the Journal said.

Digital, in Maynard, Massachusetts, can be reached at +1-508-493-5111 and on the World Wide Web at http://www.digital.com/. Intel, in Santa Clara, California, can be reached at +1-408-987-8080 and on the World Wide Web at http://www.intel.com/.

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