Cyrix Is Good At Cloning Court Cases, Too

For a small company, chipmaker Cyrix Corp. sure makes big enemies. Having dumped some $12 million into various legal fights with Intel Corp. in recent years, the $73 million chip company now has another big courtroom rival in $8 billion Texas Instruments Inc. And TI was supposed to be a Cyrix partner.

On Dec. 12, a long-smoldering dispute between the two Dallas companies finally blew, with a lawsuit and countersuit coming in a matter of hours. That ended a yearlong effort to patch up differences stemming from a 1991 deal aimed at grabbing a chunk of Intel's lucrative monopoly in microprocessors for personal computers. The agreement called for Cyrix, with no factory of its own, to provide TI with its designs for clones of Intel microprocessors. TI then would build the microprocessors and resell some of them under its own label.

"DESIGN SLAVES." For Cyrix, TI had a major advantage as a partner: a cross-licensing agreement with Intel giving it the legal right to build clones of Intel's microprocessors. Cyrix figured that would strengthen its defense against Intel, which has a suit pending charging Cyrix with patent infringement.

Now, the Cyrix-TI relationship is in a shambles. TI has sued Cyrix for not providing it with its latest designs for clones of Intel's 486 processor. Cyrix claims it terminated the partnership on July 28 because TI had breached the contract by not producing enough Cyrix chips. Cyrix' countersuit asks for an injunction forcing TI to stop using Cyrix designs. "We don't think they should be using our intellectual property without any benefit to us," says Cyrix CEO Gerald D. Rogers, a 16-year TI veteran. "We refuse to be their design slaves."

What happened? A vaguely worded contract led to conflicts that heated up last year. Cyrix pressed TI to step up manufacturing on its Intel clones; at the time, Intel was struggling to keep up with ravenous demand for the chip. Instead, TI and Cyrix both say, TI focused on producing its own products. Cyrix executives felt betrayed.

TI confirms that a shortage of capacity limited the number of Cyrix chips it could make, but says the contract did not require it to produce a specific amount. "We've gone through a year of negotiations and believe we've lived up to every thing you can live up to in a contract," says Tom Engibous, head of TI's Semiconductor Products Group.

But Cyrix claims TI is a major reason its designs have garnered only a sliver of the PC microprocessor market: TI, it says, filled less than 40% of its orders. Rogers also says TI threatened lawsuits demanding rights to Cyrix' technology just as the smaller company was preparing its initial public offering last spring.

TI's response? Vice-Chairman William "Pat" Weber said in a statement that both sides have discussed filing lawsuits. In fact, he says, the companies have penned seven standstill agreements since July in an unsuccessful effort to ward off litigation.

Despite the tussle, Cyrix' stock has done pretty well. Its shares shot up 30%, to $20.75 a share, on July 16, the day of its $29.8 million initial public offering. Its shares now trade around $24. And lately, Cyrix' actions hint of a company emboldened by success. It recently provoked a lawsuit from Intel by printing T-shirts that mocked the company's "Intel Inside" marketing campaign. In the cloner's version of Intel's logo, "Intel Inside" is replaced by the word: "Ditto."

Many analysts think that Cyrix may be just as well off without TI. Rather than try to leverage the TI deal into big royalties, Cyrix should focus on higher-margin advanced chips, such as a clone of Intel's new Pentium chip slated for release next year, they contend. TI, without Cyrix' product development costs to amortize, could afford to target sales to price-sensitive PC cloners such as Canon and Lucky Goldstar. The rub for Cyrix: that dragged down prices of its chips by 40% or more in the past year.

SUDDEN STOP. Still, Cyrix has hurdles to overcome. Even Rogers admits the company will probably have to give any new partner some marketing rights to its chips, as it did with TI. That will probably mean continued cut-price competition and pressure on earnings, which dipped from $4.9 million in the third quarter from $7.2 million the quarter before.

As for TI, analysts figure Cyrix-based chips make up only about 1% of its sales. Still, losing access to these designs could put the brakes on a key strategy--to meld Intel-compatible microprocessors with its other chip technologies to crank out custom PCs-on-a-chip. The company hints it may develop its own chip-clone technology or look for another partner.

Meanwhile, the legal sparring between TI and Cyrix should be juicy. Under CEO Jerry R. Junkins, TI has been highly aggressive in court, winning billions of dollars in royalty payments from competitors such as Japan's Toshiba Corp. And Cyrix has proved no slouch in its battles with Intel. Trouble is, in future David-and-Goliath fights, Cyrix will have two Goliaths to deal with.

Before it's here, it's on the Bloomberg Terminal.