IBM to Buy AMD? Seems Unlikely, But an Interesting Idea

Published: January 30, 2008

by Timothy Prickett Morgan

A few weeks ago, when I was complaining that Big Blue needed to rationalize its product names, I quipped that IBM could start making its own Opteron processors just so it could call its X64-based servers the System/x6 line and then make it match the System/p6 Power servers and System/z6 mainframes. I was joking, but a report in the Financial Times last week suggested that IBM and Advanced Micro Devices might be thinking of merging their processor businesses.

These kinds of rumors come around the IT industry as much out of speculation and idleness on the part of the analysts at the big IT consultancies and brokerage houses, not to mention bored editors at the IT trade rags. I didn't start such a rumor, and I don't know who did, but the FT story in its MergerMarket report is doing exactly what all of us in the press and analyst community are doing right now: using the rumor as a means to examine the possibility.

"Advanced Micro Devices and IBM may establish a more formal semiconductor tie-up than their current partnership, speculated industry sources and analysts in conversations with MergerMarket," the report said, which you can read here. A deal could see IBM's Microelectronics division merge with AMD at some point, possibly in the near term, said the sources."

That sure doesn't sound like the FT has any hard information that such a deal is under way.

IBM is, of course, no stranger to making X86 servers and it is an expert in making complex, low-volume processors with advanced processes. When IBM picked Intel as its chip partner for the original PC way back in 1980, it licensed Intel's chip designs and retained the rights to manufacture clone chips, which it did for many years for its own machinery. The reason why IBM did this is to keep its chip factories--often called fabs--warm. The price of a chip is inversely related to the volume coming out of the factories, and the fab doesn't care what instruction sets are being etched onto the silicon. IBM correctly ran X86, proprietary CISC, Power, and mainframe processors through its fabs, side by side, for many years. And the embedded PowerPC market, which has been a good market for IBM (including game consoles) helps the company cover the costs of making its own Power6 and z6 mainframe processors today. Running Opteron processors through the East Fishkill fab, where IBM is getting 45 nanometer technologies ready, makes more sense than not doing it.

AMD is already one of IBM's key partners in the development of future chip making technologies because of the prowess that Big Blue has in the microelectronics area. AMD is a licensee of IBM's chip-making and chip-packaging technologies, too, and has been for some time. IBM was, you will remember, the first tier-one server vendor to step up to the plate and endorse the 64-bit Opteron processor, and was followed by Sun Microsystems, Hewlett-Packard, and Dell, in that order. (HP is by far the Opteron server volume leader.) The funny bit is that a lot of the key techies who helped create IBM's Power RISC processors are now working at AMD, with the most important one being Phil Hester, AMD's chief technology officer. (Hester was also a founder of Opteron server pioneer Newisys, which gave Sun its initial two-socket and four-socket Opteron servers but never could get its larger iron into the field based on the "Horus" chipset.) I also have this sneaking suspicion--which has no basis in fact--that IBM would love to have a single processor socket, interconnection, and motherboard design for its various processors, and owning AMD would mean it could consolidate future Power7 and z7 cores into processors that use HyperTransport technology and plug into Opteron sockets.

A marriage between IBM and AMD could make perfect sense if IBM believed that it could more profitably make chips than it and AMD currently do separately; this would almost certainly involve the selling off of some of its own fabs or those of AMD. It would also make sense if IBM wanted to make all of the chips that are sold in its platforms, top to bottom, and if Big Blue thought it would give it a competitive edge. Buying AMD would give IBM a chance to win back Apple Computer's PC and server chip business, which IBM lost two years ago when Apple jumped to Intel processors.

The thing is, though, IBM has sold off so many commodity businesses--low-end printers, telecom and network equipment, disk drives, PCs, and high-end printers, just to name a few--that it is hard to believe that IBM would want to enter the brutal X64 processor market. If this rumor pans out--which seems highly unlikely--IBM could be thinking even more radically than consolidating down to one socket. It could be envisioning a world where it is down to a single set of server motherboards and server designs and a single, virtualized environment that supports Windows, Linux, AIX, i5/OS, and z/OS natively on X64 processor cores. This seems highly unlikely, but possible--particularly if IBM pulls an Apple and does some of the job by using emulation technology from Transmeta, which made Apple's jump from IBM and Motorola PowerPC to Intel Core processors as smooth as silk. Much to the surprise of many IT industry watchers.

Still, as interesting as all of these ideas are, IBM's recent purchase of business intelligence software maker Cognos, its biggest deal since the acquisition of groupware maker Lotus back in 1995, is not indicative of the kinds of acquisitions IBM likes to do these days. IBM likes to buy obscure, innovative companies just as they are getting ready to get some traction in the market, building out its arsenal of products and services. Going deeper into the commodity hardware business cuts against this strategy in a big way. And with IBM owning AMD, you can bet HP, Sun, and Dell would not emphasize their Opteron-based products and would push their Xeon-based servers even harder than they are now doing, thanks to AMD's delays in delivering its quad-core "Barcelona" Opterons.

As we go to press on Friday, AMD has a market capitalization of $4.2 billion, and even though it is generating roughly $6 billion a year in sales, it is not profitable. In early 2006, when Intel was still getting its Core architecture act together, AMD had a market capitalization that was nearly six times as high, but it was never much good at generating profits. That valuation that Wall Street put on AMD was more an indicator of how far Intel had fallen behind as much as the promise for future profits that AMD could have if Intel continued to screw up. (As you know, Intel got its act together, put in 64-bit memory extensions, and goosed up its laptop chips to make a new desktop and server chip line that competes well with Opterons.) AMD has $1.9 billion in cash and equivalents, so just absorbing AMD at current market cap rates would only cost IBM around $2 billion while adding perhaps $5 billion to $6 billion to its top line (how much depends on whether AMD's partners care that IBM owns it). With cost cuts, the deal might now be a financial disaster for IBM.

But I still think it is equally likely that IBM might spin out its Microelectronics division and merge it with AMD as it is likely that IBM would acquire AMD. Given IBM's history and its frustrations in the hardware business, it seems more plausible that Big Blue would pull a play out of the Sun Microsystems' playbook, becoming a designer of chips but not a manufacturer and farming out the manufacturing jobs to contractors. No matter what, you can bet IBM will keep making machines based on Power and mainframe processors for many years to come. That much is not going to change quickly, and this is what matters to customers who use these machines.

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