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Intel Plunges, AMD Soars on 486 Decision : Computers: Judge's ruling means Advanced Micro Devices will enter the lucrative market for the chips immediately.


SAN FRANCISCO — Shares of Intel Corp. plummeted and those of Advanced Micro Devices soared as investors reacted to a surprise legal decision enabling AMD to begin shipping 486-class microprocessor chips.

The dramatic stock market reaction came despite analysts' predictions that true price competition in the 486 market--where Intel now enjoys a lucrative monopoly--would not develop until next year.

Intel shares fell $12.25 to $97.75 in heavy trading on the NASDAQ market, while AMD jumped $3.875 to $28 on the New York Stock Exchange. Each stock moved about 10%.

AMD on Monday announced as expected that it would immediately enter the market for 486 chips, which incorporate special software, known as microcode, developed by Intel. A federal judge Friday threw out a jury verdict in Intel's favor and ordered a new trial in a copyright infringement lawsuit over the microcode.

There is some risk for AMD in using the Intel microcode since the basic legal issue remains unresolved. Friday's ruling by Judge William Ingram came in a case involving a chip known as a 287 that also uses the microcode. Intel says it is confident of winning in the new trial.

But several attorneys said AMD appeared to have a good chance of prevailing in a second trial. Ingram threw out the earlier verdict on the grounds that Intel had withheld evidence and altered a document that had "obvious" value to AMD's defense.

Intel is also expected to sue as soon as AMD begins shipping its 486 chips--possibly this week--and will likely seek an injunction to keep them off the market pending a trial. But legal experts say an injunction is unlikely to be granted.

AMD has calculated that the benefits of an early entry into the 486 business outweigh any legal risks. The company has been working feverishly to develop a 486 using its own microcode and expects to have that product completed by summer. It will then begin phasing out the Intel microcode product in order to minimize its legal exposure.

Investors fear that competition will curtail Intel's profit on the 486, which over the last year has displaced the earlier-generation 386 as the standard for desktop personal computers. Intel last week said earnings for its first quarter had nearly tripled, to $548 million, on record revenue of $2.02 billion--a performance based largely on strong 486 sales.

Analysts said AMD will not have enough capacity to significantly alter 486 pricing until sometime next year--and it had been expected to be in the 486 market by then anyway with its own microcode.

"This is probably overkill," said Mel Phelps, an analyst with Hambrecht & Quist. "People are saying, 'Uh oh, there goes the price.' " But, like most analysts, Phelps has not changed his earnings estimates on Intel, which factored in competition in 486s beginning next year.

Intel faced a similar challenge when AMD began cloning the 386 and responded by aggressively pushing personal computer vendors to migrate to the more powerful 486.

Over the long term, Intel aims to move the market from the 486 to its latest chip, the Pentium. But it will probably be a year or two before the Pentium begins showing up in mainstream PCs.

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