Setting up a possible brawl with Intel, Sun Microsystems is rumored to be acquiring the assets of stealth microprocessor design company Montalvo Systems, according to a source familiar with the matter.

Sun, based in Menlo Park, Calif., will acquire Montalvo’s patents, intellectual property and hire the remaining employees. The Santa Clara, Calif.-based start-up had raised $73 million in venture capital but failed to raise more money as its plans for an Intel-compatible microprocessor fell behind schedule. That’s why it had to sell off its assets to the highest bidder. Sun and Montalvo declined comment.

The Sun rumor, also reported yesterday by CNET’s, is the likeliest so far, but other companies would clearly benefit by acquiring Montalvo. The obvious ones are Nvidia and Advanced Micro Devices. For antitrust reasons, Intel itself is unlikely to get such a purchase past the Justice Department. Nvidia makes graphics chips but those might one day be subsumed into the PC’s microprocessor. Hence, Nvidia needs a processor of its own to combine a graphics chip and a processor into a single chip — or it may get swallowed up itself. AMD has its own architecture but isn’t in the best financial shape.

Montalvo tried to create an innovative processor with four cores – two big ones and two small ones – to more efficiently handle the small and big processing tasks. The theory was that such chips could operate with lower power consumption – a key requirement in a variety of computing products in the modern era of high energy prices.

Earlier this week, Montalvo cut two-thirds of its staff (our coverage). The company had tried to raise a round in the past weeks but failed (our coverage).

Sun will have a variety of options available to it. It could hire enough of the team to finish the current version of the Intel-compatible chips and begin to produce them. That would put Sun in direct competition with Intel in chips and put the companies back on a collision course.

Sun already makes its rival SPARC-based chips for its own servers and workstations. But it buys a lot of Intel chips as well for x86 versions of its machines. It could reduce its dependence on both Intel and chip maker AMD with the Montalvo chips.

But Sun could also choose to avoid a fight with Intel, using the patents to protect itself and to employ the techniques for power savings in its own future SPARC microprocessor offerings. Sun’s most ambitious processors already employ many equal-sized cores on a single chip; the asymmetric architecture of Montalvo’s chips might add interesting capabilities to Sun’s SPARC line-up. In any case, Sun could be picking up the assets at a fire sale price and using them for strategic leverage.

Lastly, Sun could use Montalvo’s patents to protect itself against lawsuits. The patent applications include a variety of inventions related to microprocessor architecture as well as power management.

Montalvo had an all-star team of microprocessor designers, including chip architects Greg Favor and Mike Yamamura, who both worked at NexGen. It had a team of Transmeta veterans, including former Transmeta CEO Matt Perry, who is Montalvo’s CEO. It also employed Peter Glaskowsky, the former editor in chief of the Microprocessor Report, as its vice president of architecture.

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