National Semi Ends IBM Chip Deal

National Semiconductor Corp., under Wall Street pressure to improve profits, broke a five-year agreement to farm out chip-making to International Business Machines Corp. and instead will build the microprocessors at its own factory.

IBM has made computer chips designed by Cyrix, the chip company bought last year by National, since 1994. Analysts had pressed National to move manufacturing to its own factories, which is cheaper than having IBM build its chips.

More broadly, the severed deal reflects the struggle by National and other chip makers to earn money on the inexpensive microprocessors used in home computers costing under $1,000, a mushrooming market targeted by National. By making the chips itself, the company also answers criticism by some Wall Street analysts that it was idling too much factory capacity.

National will move manufacturing from the IBM factory, in Burlington, Vt., to its own South Portland, Maine, plant by year-end. National is based in Santa Clara, Calif.

National will pay IBM between $50 million and $55 million as it breaks off the Cyrix deal, which was scheduled to end next April, in part to buy some unsold inventory of Cyrix-designed chips. National's earnings in the quarter ending Nov. 29 will be reduced by that amount.

In an earlier cost-cutting move, National Semiconductor asked its 13,000 employees to take time off through vacation or unpaid leave between Sept. 1 and Nov. 1. And the company this spring began cutting its work force by 10 percent.

The growing popularity of sub-$1,000 computers also has hammered profits at Intel Corp., the largest maker of computer chips, which last month introduced an improved version of a low-end chip to compete with Cyrix and AMD, another maker of low-cost chips.

IBM, based in Armonk, N.Y., does not plan any job cuts at its Vermont plant, with about 8,000 workers making a variety of chips. IBM sold the Cyrix-designed chips to other computer makers as well as to National Semiconductor, but did not use the chips in its own IBM personal computers.

The companies said they expect to fill existing orders by customers for the chips.

National's shares rose nearly 4 percent early Friday but eased by afternoon, trading unchanged at $9.93 3/4 on the New York Stock Exchange.

Written By David E. Kalish