Advanced Micro Devices to Buy NexGen : Computers: Chip maker girds itself to do battle with giant Intel with purchase of designer of microprocessors.

Fortifying itself to do battle with semiconductor giant Intel Corp., Advanced Micro Devices Inc. said it will purchase NexGen Inc., a Milpitas, Calif., designer of microprocessors, the chips that act as the brain of a personal computer.

NexGen shareholders will receive 0.8 share of AMD stock for every share they own, giving the smaller company a price tag of about $857 million. AMD’s stock closed at $26.13, down 75 cents on Friday while NexGen ended the day at $21.25, down by 37.5 cents.

The acquisition gives Sunnyvale, Calif.-based AMD a promising new weapon to compete with Intel’s immensely popular Pentium chips.

“We never felt that we could compete against Intel alone,” said AMD Chairman W.J. (Jerry) Sanders III. “The way we have to compete with Intel is with better ideas.”

Analysts said the combination makes sense.

“AMD has a big, state-of-the-art [chip fabrication] plant, but they need a design to manufacture,” said Linley Gwennap, a research analyst for the Microprocessor Report, an industry newsletter. “NexGen has good technology, but they don’t have [manufacturing].”

After floundering in the mid-’80s, AMD made a remarkable comeback by focusing on making clones of Intel’s popular microprocessors, which power about two-thirds of the world’s personal computers.

Although Intel licensed the design of its 286 microprocessor to AMD, it withdrew permission when it introduced its successor, the 386. The two companies waged a nasty and protracted courtroom battle over the 386, a fight that AMD eventually won. Intel was forced to honor the terms of an original agreement between the two companies, allowing AMD to copy Intel’s design.

But that contract has now run out, forcing AMD to design a chip compatible with Intel’s popular Pentium without a blueprint from Intel. AMD has struggled with its Pentium-compatible microprocessor, called the K5 and now about a year behind schedule.

“We underestimated the amount of time it takes to bring one of these complex chips to the market,” AMD’s Sanders said.

AMD hopes to deliver the K5 to PC makers by the second quarter of next year.

As competitors have begun to nip at its heels, Intel has slashed prices on the Pentium to keep longtime customers from straying.

Pentium is now Intel’s best-selling chip: Analysts expect it will ship 40 million of them this year.

Intel’s aggressive actions--combined with its problems finishing the K5--have caused AMD to suffer. AMD’s third-quarter profit fell to $56.2 million, or 52 cents a share, from $86.7 million, or 86 cents a share, for the same quarter last year. Sales grew a meager 9% to $590.4 million from $543.1 million for the third quarter of 1994.

Meanwhile, NexGen, started by a handful of talented chip designers, was the first company to deliver a Pentium-class chip.

Recently, NexGen debuted its successor to that product, a microprocessor scheduled to ship by mid-1996 that will compete with Intel’s Pentium Pro.

NexGen said last month it would report a larger-than-expected quarterly loss due to Intel’s aggressive price-cutting.

Sanders said AMD will continue to work on the K5, but will abandon its plans for a successor in favor of NexGen’s chip.

NexGen will be operated as a wholly owned subsidiary of AMD. Sanders said no layoffs are planned.