IBM Letting Intel Loose With Stock Sale : Analysts Say the Move Signals Renewed Confidence in Chip Maker
SAN FRANCISCO — IBM’s sale on Friday of 5.9 million shares of Intel is the third major step the computer-industry giant has taken to reduce its ownership interest in the Silicon Valley semiconductor company.
Rather than signaling a lack of confidence in Intel, IBM said its sale of the 5% stake indicates that it now believes Intel is strong enough to stand on its own two feet. Intel makes the microprocessors--tiny computers on a chip--that serve as the “brains” of IBM’s line of personal computers.
IBM invested $642.7 million in Intel during 1983 and 1984 to ensure that the company would have enough cash to develop new generations of microprocessors. At the time, Intel faced serious cash problems as a result of an industry slump and bruising competition from Japanese semiconductor houses.
But with demand surging again for personal computers, and with Intel the sole supplier of the high-end 80386 device used in top-of-the-line IBM and compatible personal computers, the company is thriving.
Intel’s net income in the first half of the year was $72 million, contrasted with a year-earlier loss of $43 million, on a 42% gain in revenue to $833 million. “We feel that our goal of strengthening a major partner has been accomplished,” IBM spokeswoman Marti Easterbrook said. IBM’s after-tax profit of more than $80 million was pure gravy.
When IBM announced its decision to buy a stake in Intel, there was widespread speculation that the deal was a precursor to an acquisition of the entire company. That speculation was heightened when IBM swallowed telecommunications equipment supplier Rolm after first buying a small stake.
But that possibility began to wane in February, 1986, when IBM reduced its Intel stake by selling $300 million in Eurobonds that are convertible into 7.8 million Intel shares.
“That was the beginning of the unwinding of IBM’s position,” said analyst Steven Cohen of Gartner Securities in Stamford, Conn.
The second step came in June this year, when IBM sold 8.9 million Intel shares back to the newly cash-rich semiconductor company for $361.6 million. With Friday’s $300-million sale, IBM will continue to hold 7.8 million shares, or slightly more than 6%, of Intel.
“Those shares will exactly cover the conversion of the Eurobonds” when the buyers of the IBM bonds exchange them, said William Easterbrook, an analyst for Kidder, Peabody & Co. in San Francisco and no relation to the IBM spokeswoman.
Despite the sale, “IBM and Intel continue to maintain a strong and productive business relationship,” IBM said in a statement Friday.
An Intel spokeswoman added that IBM remains Intel’s largest customer.
But analyst Cohen noted that, unlike the old PCs that IBM assembled from purchased parts, the company’s new line of personal computers, known as the Personal System/2, is being manufactured largely with IBM-built components.
“I expect you’ll even begin to see IBM supply its own microprocessors,” Cohen added. Intel has granted IBM the only license to make the high-end 80386 microprocessor.
In any case, the analyst said, “IBM is focusing a lot more on its own main lines of business.”
“They’ve been cutting back on outside investments,” he added, noting that IBM and Merrill Lynch recently disbanded a joint venture to provide automated securities quotes to brokerage houses.
IBM also acquired a 16.6% stake in MCI, the long-distance phone company, in October, 1985.
