The irony was unmistakable. On the same day that Advanced Micro Devices Inc. (AMD) (NYSE: AMD) replaced its president and CEO, Dirk Meyer, Nvidia Corp. (Nasdaq: NVDA) announced it struck an agreement "ending all outstanding legal disputes" with Intel Corp. (Nasdaq: INTC). (See AMD Dumps CEO, Starts Search for New Head and Intel in Patent Accord With Nvidia.)
Nvidia will get $1.5 billion to end the dispute and agree to a cross-license patent agreement with Intel. The agreement is reminiscent of a similar one AMD signed with Intel and raises the questions: How has AMD fared since? And what lessons can Nvidia learn from its graphics IC rival's experience?
The Nvidia transaction sets the world's biggest semiconductor company free to pursue its strategic objective of establishing a more formidable presence in what's shaping up to be the hottest segment of the IC market -- wireless devices, including smartphones and tablet computers. By paying less than one-tenth of its cash and short-term securities to Nvidia, Intel eliminated a potentially nightmarish legal tussle and, for now anyway, curtailed the ability of federal regulators to poke around in its affairs.
Nvidia may not derive as much long-term satisfaction from the deal, although it probably had no other viable option but to settle with Intel. On the positive side, the cash it is getting from Intel can be invested directly into R&D or for other strategic marketing operations, including product development for new sales opportunities. Nvidia has almost no long-term debts -- $23.4 million at the end of it last fiscal quarter -- and did not make the deal for monetary reasons alone.
However, Nvidia is also a troubled company whose sales have been sliding due to pressure on its core graphics IC business from rivals AMD and Intel. Nvidia's sales in the fiscal third quarter ended Oct. 10, 2010, were down 14 percent, to $843.9 million from $982.5 million in the previous year's third quarter. For the current quarter, analysts forecast sales will continue to slide, falling approximately 11 percent to $879 million from $983 million in the comparable quarter of 2010. The cash from Intel is good, but what Nvidia needs right now is a significant sales boost, and that will only come from having competitive products. That's a problem it shares with AMD.
What's the other connection between AMD and Nvidia? They were both fighting the same company, which has now bought them off after first clobbering and weakening them in the marketplace. In November 2009, Intel agreed to pay AMD $1.25 billion to end all legal disputes between them. AMD had filed complaints against its microprocessor archrival on three different continents and seemed to have regulators in Europe, Asia, and the US queuing up to help it knock the stuffing out of Intel.
The payout hardly dented Intel's bank account, and within a few quarters the company had rebuilt its cash hoard. Further, by ending the litigation, it gained the freedom to refocus management attention on pressing structural alignments required to establish a presence in the wireless market -- and, of course, it continues to wallop AMD in the microprocessor segment. In December 2009, Intel reported approximately $14 billion in cash and short-term investments, but less than one year later, when it posted September quarter results, this had grown to $20.8 billion. With cash like that, you can silence most enemies.
Meanwhile, AMD has remained more or less in the same hole it had been pushed into during years of savage competition with Intel. Its cash and short-term investments swelled up to $2.7 billion at the end of 2009 but were down to $1.7 billion by the third quarter of 2010. (Long-term debts fell more than $2 billion during the same period, though.) In the capital-intensive semiconductor market, AMD's limp would have been more pronounced had it not received the money from Intel.
Nvidia may soon find itself in the same precarious position. Intel will pay the $1.5 billion over five years, and the companies will sign a comprehensive cross-license deal to resolve their disagreement. Intel's goal was summed up in the press statement announcing the transaction. "This agreement ends the legal dispute between the companies, preserves patent peace and provides protections that allow for continued freedom in product design," said Doug Melamed, Intel's general counsel. "It also enables the companies to focus their efforts on innovation and the development of new, innovative products."
The combined $2.65 billion Intel has agreed now to pay AMD and Nvidia is a small sum to pay for this peace of mind, considering regulators around the world were beginning to more closely scrutinize its operations following complaints from competitors. Neither AMD nor Nvidia will now cooperate in any regulatory investigations into Intel's sales and marketing practices or dispute its rights to the patents covered under their agreements.
The winner here is Intel, the company with the most cash and the most to lose. With AMD and Nvidia feeding quietly from its cash trough, Intel can more intently focus on a more dangerous foe -- ARM Ltd. (Nasdaq: ARMHY; London: ARM)