Intel Charged in Antitrust Suit

The $6.0 billion payment made by the world's largest chip maker Intel Corporation (INTC - Analyst Report) over a five year period through January 2007 to its largest customer Dell Inc. (DELL - Analyst Report) -- under programs initially titled 'MOAP' (Mother of all Programs) and then 'MCP’ (Meet Competition Payments) -- has backfired on Intel.

This is the basis on which an antitrust lawsuit filed recently by the New York attorney general alleging a long business relationship between Intel and Dell. Andrew M. Cuomo filed a federal lawsuit against Intel, accusing the largest chip maker of paying computer makers illegal rebates for maintaining its monopoly and preventing another chip maker, Advanced Micro Devices Inc. (AMD - Analyst Report), from gaining business with PC makers.

This is not the only allegation that has been filed against Intel. In a similar case earlier this year, the European Commission imposed a penalty of $1.45 billion on the company, alleging illegal rebates to PC makers such as Dell and Hewlett-Packard (HPQ - Analyst Report). AMD also made analogous allegations in its case filed against Intel in June 2005 that is scheduled to come to trial in March 2010.

The document filed in the New York Attorney General's office refers to the communication that took place between senior executives at Dell and Intel and discloses the fact that Dell is depending on money received from Intel to meet its financial targets. Taking reference from an investigation initiated in January 2008, the current lawsuit also discloses accounting methods used by Intel to justify payments that were not backed by any legal business transaction.

Although Intel denies the allegations of unfair payments to Dell and counters it by saying that the payments resulted in lower prices for customers, we believe Intel will find it hard to prove its innocence. Dell has stated that the company has the freedom to choose its suppliers, which we believe offers Dell a defence against this allegation.

Although we believe this lawsuit could result in some pecuniary loss to the two companies, we believe the negative sentiment will be short-lived, as both companies are successfully executing their long term strategies.