Resolving a Patent Dispute Through an Acquisition
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When Intel and Digital Equipment Corporation (DEC) recently announced that they would be settling a patent dispute out of court through an acquisition, they were following a long-established business strategy. Where mergers and acquisitions during the 1980s typically centered on companies buying each other and then dissolving the acquired company and selling the assets, Intel's acquisition of DEC's chip manufacturing is an effort by Intel to rid itself of competition and settle what could have been a costly court case. From DEC's standpoint, selling its Alpha chip technology provides it with much needed cash and allows it to concentrate on other business units. Far from the predatory nature of mergers and acquisitions of the 1980, this transaction would seem to be a positive one for both parties. This research examines the transaction itself, the companies involved, and what the acquisition is likely to mean for both companies and the industry as a whole.Companies consider acquiring other organizations for many strategic reasons. During the 1980s, companies often sought out other organizations which had large amounts of cash and little debt; these companies could be acquired and liquidated easily, providing the acquiring companies with an influx of cash and profits. This is a short-term acquisition strategy that does not take into account the strategic alliance of the two companies. In other situations, smaller companies may seek
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t around the Alpha chip technology. Despite this technical advantage, sales of the chip have been disappointing. Revenues from the chip and related products declined 8 percent in the third quarter of fiscal 1997, the result of price cuts implemented in January 1997 of up to 55 percent. The advantage of entering the market first is a short-lived advantage that will be vulnerable when the Merced project of Intel and Hewlett-Packard comes to market.
Financially, DEC is struggling. Its current ratio has remained below 1.9:1 since 1991, and the company has posted losses in five of the last 10 years. An investor who put $10,000 into the company in 1992 would have lost money by 1997: the investment would be worth $9,151. Over the past five years, sales have declined at an average annual rate of 3.5 percent, while net income has declined at an average annual rate of 9.0 percent. The recent acquisition was negotiated against this backdrop.
Structure of the Deal
Under the deal, Intel will purchase DEC's semiconductor operations and manufacture the Alpha chip; DEC will retain control over the design of the chip family and will develop systems based on Intel's own 64-bit architecture. This is perhaps the most unusual aspect of the
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Approximate Word count = 2082
Approximate Pages = 8 (250 words per page)
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