In Unusual Step, I.B.M. Buys Stake In Big Supplier Of Parts

By Andrew Pollack
The New York Times

December 23, 1982

In an unusual effort to aid an electronics company that supplies it with vital parts, the International Business Machines Corporation announced yesterday that it will pay $250 million to purchase 12 percent of the Intel Corporation.

The mutually agreed-upon purchase - one of the very few I.B.M. has made in another company - forges a link between two powerhouses of United States technology. I.B.M. is the world's largest computer manufacturer, and Intel is a highly innovative company that makes microelectronic circuits, often called semiconductor chips, that are used to build the computers made by I.B.M. and others.

Industry analysts said the infusion of cash would give Intel the resources to compete better against the Japanese electronics companies, which are making inroads into the industry. Semiconductor companies such as Intel are having difficulty raising the huge amounts of capital needed to develop new products because the recession and stiff competition from Japanese companies are eroding their profits.

Edward Nanas, director of information at I.B.M., said the purchase was made as an investment and to strengthen Intel because it is a major supplier. ''We believe it is in the best long-term interests of I.B.M. to have a strong merchant semiconductor industry,'' he said.

Although Mr. Nanas said I.B.M.'s investment in Intel was not related to Japanese competition, industry analysts said I.B.M. was concerned that if domestic suppliers fell behind the Japanese, I.B.M. would have to rely for chips on Japanese manufacturers that also compete with I.B.M. in the manufacture of computers.

''I think it has enormous implications,'' said L.J. Sevin, a venture capitalist and former chairman of the Mostek Corporation, another large semiconductor company, referring to yesterday's agreement. ''Intel is our technology flagship.''

Under the agreement, I.B.M. will buy 6.25 million newly issued shares of Intel at $40 a share, for a total of $250 million. Intel shares, which trade over the counter, closed at $39.50 yesterday, up $3, while I.B.M. stock dropped $2.25, to $93.50.

The agreement also states that I.B.M. may seek to acquire up to 30 percent of Intel's stock. There are provisions for renegotiation after eight years, according to James W. Jarrett, an Intel spokesman.

The company stressed that Intel would remain independent and that I.B.M. would not participate in the day-to-day management of Intel, which is based in Santa Clara, Calif. Intel will continue to sell to others and I.B.M. will continue to buy from other chip manufacturers.

However, a person recommended by I.B.M. would be named to Intel's board of directors. The director would be excused from board deliberations in which there was a potential conflict of interest, the companies said.

''We welcome I.B.M.'s investment,'' Gordon E. Moore, chairman and chief executive of Intel, said in a statement. Industry officials agreed that the deal offered great benefits for Intel and I.B.M. ''It looks like a marriage made in heaven for both,'' said Thomas J. Crotty, an analyst with the Gartner Group, a market research firm in Stamford, Conn.

For Intel, the $250 million is equivalent to almost twice Intel's 1982 capital expenditures of about $130 million. Intel is in strong enough condition to have raised money in other ways, such as through a public stock offering, but it would have got less.

''Intel found a way to be bullet-proof,'' said W.J. Sanders 3d, chairman and chief executive of Advanced Micro Devices, another semiconductor company.

A Two-Year Slump

Like other semiconductor companies, Intel, whose revenues this year will approach $900 million, has been in a slump for about two years. Earnings for the third quarter of 1982 were $8.4 million, or 18 cents a share, 23.3 percent below a year earlier. And 1981 earnings were 61.8 percent below those of 1980. The company has said it will reduce all salaries by up to 10 percent on Jan.1 and freeze them for a year.

More intriguing is the motive of I.B.M., the world's largest computer company with 1981 revenues of $29 billion. The company has traditionally grown through its own expansion, rather than by buying stakes in other companies. Analysts say that is partly because I.B.M. was a defendant in a Federal antitrust suit from 1969 until the suit was dropped last January. The Justice Department had charged that I.B.M. had attempted to monopolize the computer industry.

There have been a few minor exceptions: In 1964, I.B.M. purchased Science Research Associates, an educational publisher based in Chicago. In 1980 it bought minority interests in Bruker-Physik A.G., a West German laboratory instruments maker, and in some of its affiliates.

The Intel deal requires antitrust clearance by either the Justice Department or the Federal Trade Commission. Mr. Nanas said I.B.M., which is hopeful it can attain permission, told the Justice Department about the possible purchase before it was announced, but got no feedback.

The purchase of the Intel stake, while involving a small amount of money by comparison with I.B.M.'s annual revenue of $30 billion, is nevertheless considered unusual because I.B.M. has invested all its available cash in its own operation, and has even borrowed for investment.

Some analysts suggested I.B.M. needed technology from Intel that was more advanced than its own. Although the agreement will not give I.B.M. access to Intel technology and patents, it will allow I.B.M. to keep a better watch on developments in the semiconductors business.

Adam Cuhney, an analyst with Salomon Brothers, said I.B.M. was increasingly dependent on Intel chips, not so much because it cannot make its own, but because it makes more economic sense to buy from others. Until a few years ago, I.B.M. made virtually all its own chips; indeed, it is still the world's largest maker of semiconductors, although it doesn't sell chips to others.

Intel supplies the microprocessors, the kind of chips that are the heart of I.B.M.'s fast-selling personal computer, its Displaywriter word processor and the Datamaster, a small business computer. In September, Intel was chosen by I.B.M. to provide design and other technology for I.B.M.'s advanced 64K random access memory chip, or RAM, which can store more than 64,000 units of data. I.B.M. is Intel's largest customer, accounting for 13 percent of its 1981 sales.

Others May Have Been Interested

Mr. Garrett said I.B.M. might have been moved to buy a stake in Intel before someone else did.

Many other semiconductor companies have been acquired over the years by larger industrial concerns that sought to bolster their own capabilities in a vitally important technology. General Electric owns Intersil, Schlumberger Ltd. bought Fairchild Camera and Instrument and United Technologies purchased Mostek.

Most of the companies acquired needed the financial support of the larger companies. Mr. Jarrett of Intel said however that no one had been trying to acquire the company. Others point to the Japanese threat. Japanese chip manufacturers such as Hitachi Ltd. and Nippon Electric also make computers and many other products and thus have greater financial resources than companies like Intel, which specialize in semiconductors.

To cope with such higher equipment and research and development costs, cooperation among companies is becoming more common. American semiconductor and computer companies have recently formed two organizations to sponsor joint research and development. Some industry officials have expressed hope that antitrust laws would be relaxed to allow American companies to cooperate more closely and better compete with foreign companies.

Copyright 1982 The New York Times Company