The settlement announced Thursday sent AMD stock soaring and ended a 4-year-old lawsuit in which AMD accused Intel of abusing its dominance of the chip market to keep a lid on AMD's share. Intel has about 80 percent of the microprocessor market, and AMD has about 20 percent.
According to the lawsuit, Intel penalized computer makers for using AMD's chips or offered them financial incentives - payments that a Toshiba Corp. manager likened to "cocaine." Executives from Gateway complained that Intel's threats of retaliation for working with AMD beat them "into guacamole."
Intel has defended its practices, saying it simply offered rebates to big customers, which allowed them to pass lower PC prices to consumers. A microprocessor can account for 15 to 20 percent of the cost of a computer, according to Martin Reynolds, a vice president with the Gartner Inc. research firm.
But despite Intel's stance it did nothing wrong, the AMD lawsuit, which was scheduled to go to trial in Delaware in March, was one of Intel's biggest headaches. Squashing the case removes the possibility Intel would be on the hook for even more if it lost at trial, Intel CEO Paul Otellini said.
"While it pains me to write a check at any time, in this case I think it was a practical settlement," Otellini said on a call with analysts. Intel shares fell 16 cents, 0.8 percent, to close Thursday at $19.68.
The settlement will help AMD whittle its $3.7 billion in debt. Its shares jumped $1.16, or 22 percent, to close at $6.48. But even before Thursday, AMD's complaints had their desired effect: Antitrust regulators in several countries have filed cases against Intel based on AMD's accusations - cases that won't disappear because of the settlement.
The U.S. Federal Trade Commission is investigating Intel, and regulators in Europe have fined Intel a record $1.45 billion. Intel has paid the fine but is appealing it. EU spokesman Jonathan Todd said Thursday 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.
Regulators in Korea have fined Intel $18.6 million - Intel is appealing that as well - and last week New York Attorney General Andrew Cuomo filed a federal lawsuit accusing Intel of using "illegal threats and collusion" to dominate the chip market "with an iron fist." In 2005, Japan's Fair Trade Commission found that Intel violated antitrust rules there. Intel accepted that ruling without admitting wrongdoing.
Intel can easily absorb the latest penalty.
The company made enough money in just the first nine months of this year to pay the European fine and the AMD settlement and still have nearly $1 billion left over. Since AMD sued Intel in 2005, Intel's profit has totaled $28 billion.
In that same time, AMD has lost more than $7 billion.
Some of AMD's problems have been of its own doing, such as its $5.6 billion acquisition of ATI Technologies in 2006. That made AMD a player in the market for graphics chips, but saddled AMD with loads of debt. AMD also lost billions trying to keep up with Intel in the companies' equivalent of the arms race - the effort to constantly build chips with the most advanced manufacturing techniques.
But AMD has long blamed many of its problems on Intel's behavior.
It's not clear how much Intel's tactics will change under Thursday's pact. 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, reached an accord that gave AMD the right to keep producing chips based on a design known as the "x86 architecture," which both companies still use today.
In fact, that 1995 deal was important in the new settlement. As part of its restructuring, AMD has spun off its factories into a separate company, to cut costs. Intel said the move violated the x86 licensing agreement, while AMD held that the spinoff didn't need a new license to make chips that incorporated Intel's technology.
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.
"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 rather than the $2.9 billion it had previously forecast. But it also expects its tax rate to be 20 percent rather than 26 percent because it says legal settlements are tax deductible.