VLSI officials reportedly proposed the alliance to Intel earlier this year following merger overtures by Advanced Micro Devices to VLSI. James Fiebiger, president of VLSI, when asked last week about AMD’s initial interest, side-stepped the issue, commenting “We saw no better partner we could align ourselves with than Intel.”

However, asked two months ago if his company had been in discussions with VLSI, AMD chairman Jerry Sanders confirmed “We were,” but added “We couldn’t come to an agreement on value. And more than that I don’t want to say” (EN, May 25).

While the terms of the Intel-VLSI contract confirmed earlier reports about the alliance (EN, May 18), the agreement is relatively limited in scope. Intel will transfer a single design to VLSI, and will not market any devices produced by that company. There are no plans for joint development, and Intel will not immediately place a representative on VLSI’s board although it has the right to do so.

The investment is the first made by Intel in another semiconductor supplier. “We realized that we needed the help of a company with VLSI’s customization capabilities in order to offer what our customers wanted,” said chief executive Andrew Grove in a prepared statement, adding that the investment is intended to help VLSI to execute successfully the new designs under the pact.

The exact share of VLSI to be acquired by Intel has yet to be determined, but will be under 20 percent. Intel will also gain the right of first refusal should a third party offer to acquire the rest of VLSI.

Dr. Fiebiger said the 386SL core, which has a low-voltage static design, will make it ideal for the palmtop market. “There’s a very broad range of applications for it in information retrieval, communications, educational products, security devices, games and other areas,” he said. “It’s a very cost-sensitive marketplace, but we think we can be very effective in it and make money.”

VLSI will pay royalties to Intel for use of the 386SL core, which it will integrate with its library of personal computer Functional System Blocks (FSB). “We can optimize the core for each application, taking out any functions we don’t need,” Dr. Fiebiger said.

Devices designed by VLSI using the 386SL core will be manufactured by Intel and marketed by VLSI, while peripheral circuits used in conjunction with those devices will be both manufactured and sold by VLSI.

Mike Aymar, vice president and general manager of Intel’s Entry Level Products group, said his company was banking on VLSI’s “ability to come to market quickly using their design tools and Functional Systems Blocks.” First products are expected out in the second half of next year.

While VLSI is not precluded by the contract from designing circuits for high-end computers using the 386SL core, Mr. Aymar said that market has already moved to the 486 microprocessor. VLSI is also free to continue making chip-sets that work with non-Intel microprocessors, as it currently does with AMD’s 386 device.

Chips & Technologies recently claimed in a lawsuit that the 386SL infringes on one of its chip-set patents, which could potentially make VLSI a party to the suit. Dr. Fiebiger said “I don’t think we can speculate on that, but we’ve been in the chip-set business as well.”

While VLSI is expected to focus on custom and semicustom designs using the 386SL core, it is anticipated that Intel will continue working on standard products for the palmtop market using the same architecture. The company scrapped a 16-bit processor code-named HHC1 last year which was intended for the palmtop market, and is believed to be working on a 32-bit version known as HHC2 (EN, Antenna, Feb. 3).

As originally reported (EN, March 16), Intel and VLSI issued a terse statement on the proposed alliance, disclosing they signed a letter of intent under which Intel would acquire a minority stake in VLSI as part of a technology sharing arrangement. Sources subsequently indicated the Intel/VLSI agreement would call for Intel to invest about $50 million to buy a 19 percent stake in VLSI at $10 a share. Neither company would confirm those estimates at the time.

The same sources indicated AMD was initially prepared to pay over 30 percent of market value for an unspecified equity stake in VLSI. Asked in May if his remark that AMD and VLSI “couldn’t come to an agreement on value” referred to a proposed equity deal, Mr. Sanders declined further comment.

Chipmaker VLSI Technology Inc said Friday that its board has outright rejected the unsolicited takeover bid from Philips Electronics NV. The company’s board voted unanimously against the $17 per share offer, judging it “inadequate and not in the best interests of its stockholders,” and has recommended that holders not tender their shares to Philips.

The board has decided that the company should explore strategic alternatives, including a merger or sale to a different suitor or re-capitalization of the company. It will continue to engage in discussions with possible partners, it says, and hasn’t ruled out negotiations with Philips itself on a new deal. Philips went public with its $778m offer for VLSI on February 25 - which then represented a 58% premium over the share price - and took it directly to the shareholders just a week later, when it appeared that VLSI was dragging its feet. Earlier last week, Philips had made moves to oust VLSI’s board by filing a consent solicitation with the Securities and Exchange Commission which would allow VLSI’s shareholders to vote the current board out and replace them with candidates put forward by Philips. VLSI shares closed at $19.50 Friday, up $0.5625.

Philips Electronics NV is stepping up its efforts to get its $17 per share cash tender offer for VLSI Technology Inc accepted, and late on Friday filed a consent solicitation with the US Securities and Exchange Commission seeking consent from VLSI stockholders to remove the VLSI Board or Directors.

Philips wants to replace the Board with nominees who, subject to their fiduciary duties, would allow Philips to proceed. It has requested that VLSI sets a record date to establish which stockholders are entitled to participate in the consent solicitation, and hopes to be ready to send the consent statement out in around two weeks time. The company said it still remains hopeful that VLSI will enter negotiations soon. Philips commenced its tender offer for all the outstanding shares of VLSI on March 5, at a 58% premium on the closing price per share on February 25th, when the offer was first disclosed. It currently owns 1,235,000 or 2.7% of the shares. Credit Suisse First Boston is its financial advisor.

Philips Electronics NV is not giving up on its hostile bid to acquire VLSI Technology Inc and has extended the $777m offer to April 16. The offer, which was originally due to expire last Thursday, values San Jose-based VLSI at $17 per share. VLSI said that its board of directors continues to recommend that its stockholders not tender their shares to Philips, which claims that only about 144,200 shares of VLSI’s common stock had been validly tendered and not withdrawn up until now.

Philips first launched the bid on March 5 and VLSI, after rejecting it outright, has been actively seeking a better deal from a pool of unnamed suitors. It says it has reached agreements with several of them for exploratory talks that will grant the would-be buyers access to inside information on VLSI’s business. Meanwhile, Philips and VLSI have been attempting to reach a similar agreement that would allow them to begin negotiating a revised offer. Reports have suggested that a sticking point has been the length of a “stand still” period during which Philips will suspend its hostile takeover.

The company plans to purchase up to 2 million shares. The program provides that repurchased shares may be reissued to employees under the company’s stock option and stock purchase plans.

The company plans to continue purchasing shares under the program at appropriate opportunities based on several factors, including the level of employee stock option exercises, the price of VLSI’s stock, and market conditions.

About VLSI Technology

VLSI Technology, Inc. designs and manufactures System-Level Silicon(tm) integrated circuits based on its FSB(tm) functional system blocks(tm) library. Targeting its offerings toward the wireless communications, networking, consumer digital entertainment and computing markets, the company offers its customers advanced system-level integration capabilities.

Note to Editors: FSB, functional system blocks and System-Level Silicon are trademarks of VLSI Technology, Inc. All other brand or product names are trademarks and/or registered trademarks of their respective owners.

Qualcomm is set to bar VLSI Technology’s new parent company, Philips Electronics, from selling its chipsets for use in CDMA-based digital cellphones. VLSI was originally awarded a licence for the technology in the mid-1990s.

A Qualcomm spokeswoman said: “Because VLSI was acquired by Philips, VLSI is no longer granted a licence for the chipset.”

The action will leave the market with fewer chipset sources in what has become a booming CDMA sector. According to research by Dataquest, worldwide production of CDMA handsets will grow from 8.7 million units in 1997 to 69 million in 2002.

The move was obviously unexpected as, in recent weeks, VLSI/ Philips had stated that the company was moving ahead with the development and sale of its CDMA-based chipset line - an integrated product based on the ARM7 risc chip.

It appears that both Ericsson and LG Electronics were evaluat-ing the VLSI-developed chipset along with a number of other OEMs.

Industry analysts point out that Qualcomm owned 89% of the CDMA-based chipset market in 1998, a figure that is expected to drop to 77% by the end of 1999, declining still further to 43% by 2000. This falling share has been cited as a possible reason for withdrawing the VLSI licence.

The change of heart over licensing CDMA to VLSI comes only six months after Qualcomm and Ericsson settled their dispute over intellectual property rights to the technology. Both parties agreed to jointly support a single world CDMA standard.

Ericsson declined to comment on whether it was interested in buying the mobile telephone division of Qualcomm.

But a spokeswoman says the purchase will not fit in with the company’s acquisition policy. Qualcomm aims to sell its mobile business by the end of the year.

In a suit filed in Santa Clara County Superior Court, Zitel Corp. accused VLSI Technology Inc. of breach of contract, fraud, negligent misrepresentation and other charges, and is seeking over $300 million in damages. VLSI was allegedly unable to deliver a custom chip design for Zitel’s Intelligent Storage Systems division, leading Zitel to leave the mass storage business last year and incur millions of dollars in lost opportunities.

VLSI Technology has committed itself to offering copper interconnect technology with its next-generation VSC11 0.15 micro m process technology. It is due to come on-line in 1999 with the maturity of the copper processing equipment.

VLSI’s strategy is to offer copper at the upper metal layers of interconnect in an asic block, levels 4 and 5, and continue to use aluminium for the lower levels. Copper is proposed for the connections between blocks providing a high-speed `superhighway’.

Dipu Pramanik, director of process technology for VLSI, said: “Our studies have shown that using copper at the lowest levels of the block provides only a 3 to 10% improvement.”

Aluminium is also likely to be used in the packaging interconnect because bonding copper to packaging substrates is still an open issue.

The VLSI technology roadmap predicts copper being used in all metal layers at 0.13 micro m geometries.

Asked about the importance of Novellus’s announcement of the Damascus copper deposition production toolset, VLSI agrees it is significant, but says there are still many issues to be resolved in incorporating copper at all levels of a device - primarily the need for mature processing equipment.

The company intends to expand its design activities because of increasing competition in the VLSI sector, according to director Nobuo Hatta, who spoke to Electronics Times on a recent visit to the UK.

Rohm has not yet decided where to site the centre. It currently has UK offices outside Milton Keynes and another European operation in Germany.

Hatta said: “It is increasingly difficult to make money in the VLSI sector without a heavy investment in people. Companies need to generate new designs on shortening cycles to maintain their margins.”

Rohm is also seeking to raise its share of the European IC market across all applications, but with a particular focus on telecoms.

Rohm does not produce branded consumer products but prefers to be able to supply components to as wide a range of companies as possible.

Philips’ US banker Credit Suisse First Boston and law firm Salomon & Cromwell made the first official contacts after an invitation from Al Stein, VLSI’s chief executive.

Stein wrote to Arthur van der Poel, chairman of Philips Semiconductors, stating that “we will look forward to working out a process of discussions with you”, when the Dutchman appeared to soften his original threat to pursue an entirely hostile bid if VLSI did not open talks before early March.

Stein is nevertheless keeping Philips at arm’s length. His letter continued: “The most effective way to establish this process is to have your lawyers and investment bankers contact our counterparts.”

Philips had been seeking direct negotiations between the two companies’ boards.

VLSI has also tightened its `poison pill’ bid defence, which is being challenged by Philips in the US courts. The defence will flood the market with VLSI shares if any bidder or new shareholder secures more than 10% of the company.