Intel Gains Most in Deal with Sun Microsystems

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Once rivals,

Intel

(INTC) - Get Report

and

Sun Microsystems

(SUNW) - Get Report

are now quasi allies thanks to a newly signed deal that will bring Intel one step closer to ruling the microprocessing chip world.

Announced after the opening of the bell today, the two leading rivals have agreed to settle their technological differences by working in tandem to optimize Sun's proprietary Solaris operating environment for Intel's future Merced microprocessor chip.

The two had been battling over dueling chips, both for high-end workstations and server computers. Under the new deal, Intel will support Sun's efforts to deliver a 64-bit-optimized version of Solaris to run on Merced-based systems, which are expected in 1998.

The deal also calls for a royalty-free patent cross-licensing agreement covering microprocessors, systems and software technologies.

"The

chip game is over," says John Geraghty, an analyst

Credit Suisse First Boston

. "The Merced is the Intel de facto chip of choice. For Sun to produce a separate chip from Intel is futile."

The stock reacted to the news with mixed results. Intel closed down 15/16 at 72 1/8, while Sun closed up 1 5/8 at 35 1/8. The later traded on extremely high volume of 10.2 million shares, up from its 30-day trading average of 6.2 million shares.

The deal sits well for Intel, which now adds another vendor notch to its Unix bedpost, and furthers Intel's quest to be the provider of the dominant PC-chip architecture in high-end computers.

"This just brings Intel one step closer to being a true monopoly in the chip area and being the

Microsoft

(MSFT) - Get Report

of its sector," says Alex Karamanoglou, president of

NGA.Net

, an Internet consulting firm. "There are a handful of smaller guys left, like

Cyrix

, but Intel is clearly headed into Microsoftdom."

For Sun, the company essentially is hedging its bet. Sun would likely have seen a drop in demand of their chips as the Merced gains acceptance. The deal is a way to protect themselves from that.

¿¿¿¿ And, without the alliance, the company was running the risk of becoming another Apple, offering a microprocessor incompatible with other systems, and therefore risking becoming obsolete or of interest to only a small minority of users.

"Sun doesn't win, but they don't lose," says Chris Chaney, semiconductor analyst at

A.G. Edwards

. He says by joining with Intel, Sun reduces competition and reduces the risk of its Ultrasparc microprocessor not succeeding.

"It helps ensure that Sun stays in the ball game," adds Daniel Niles of

BancAmerica Robertson Stephens

. "The fact that its guts may have Merced technology is a big plus, and could help further its software sales."

Overall though, the deal doesn't mean a great deal for investors. The chips will not be available until 1999 and will only be installed on high-end systems. It will have little to no effect on immediate earnings.

It is, however, part of Intel's strategic long-term positioning plan. And, as the cost of the chips come down over then next two or three years, it will be rolled into the consumer PC market, which will have a significant earnings implications.