Wednesday October 11 4:33 PM ET

IBM Shares Dip on Chip Supply Problems Rumor

By Nicole Volpe

NEW YORK (Reuters) - Shares of International Business Machines Corp. (NYSE:IBM - news) fell about 6 percent in morning trade on Wednesday amid a rumor that the world's largest computer maker was having trouble supplying increased demand for computer chips for a major customer.

During the morning, IBM shares touched a low of $107-1/2, a level not seen since mid-July, before recouping to close off $2 at $112-13/16 on the New York Stock Exchange (news - web sites).

One trader, who asked not to be named, cited a rumor that IBM was having problems supplying chips to Cisco Systems Inc. (NasdaqNM:CSCO - news), the world's largest maker of computer networking equipment. IBM said the shortage was in the ceramic packaging, which is used for mounting and connecting multiple chips together.

IBM spokesman John Bukavinsky said, ``It's no secret there's a shortage of the ceramic packaging (for chips). But as far as a specific customer goes, we would never discuss a specific relationship.''

However, IBM said that it was not out of the ordinary for customers to increase orders three or four times this year.

Salomon Smith Barney analyst John Jones said increased demand for chips was affecting IBM as well as computer workstation maker Silicon Graphics Inc. (NYSE:SGI - news) and Cisco.

``Cisco's demand for parts has gone up two to three times what they were forecasting in the beginning of this year,'' Jones said.

``That's the scuttlebutt we hear in the (Silicon) Valley.'' Cisco was not immediately available to comment.

Silicon Graphics spokeswoman Larissa DeCarlo said the company disclosed in a conference call on Monday that it was having trouble meeting demand for its computers, citing a shortage of ceramic packaging.

Wit SoundView analyst Gary Helmig said IBM's chip-making operations are running at 110 percent capacity. ``They can't take on new contracts or other than the ones on the books,'' he said.

Analysts said only 4 percent of IBM's revenues comes from sales of chips to other technology companies.

``The outside chip sales are not a big piece of IBM's business,'' said Buckingham Research Group analyst Jay Stevens. ''Cisco is a customer of IBM, but I have no confirmation of that rumor.''

He added, ``But it doesn't make sense to me that this would be a major problem for IBM. In this kind of market, the concept is sell first and evaluate the information later.''

Sanford C. Bernstein analyst Toni Sacconaghi, commenting on the decline in IBM shares, said the stock may be succumbing to negative investor sentiment about the tech sector at large.

``While some of the names in the hardware sector have been getting beaten down, IBM wasn't,'' said Sacconaghi. ``Some of this could be catch-up and some of it could be the rumor du jour.''

IBM's inability to meet demand for its chips is widely known. IBM said on Tuesday it would invest $5 billion to expand its chipmaking operations, saying it was chasing ever-increasing demand. make some and we sell some, 766 3965, IBM makes it but others do, we do make it for ourselves and for other vendors, the demand for ceramic packaging is extremely high, when we make a chip,

http://dailynews.yahoo.com/h/nm/20001011/bs/ibm_stock_dc_4.html

-- Carl Jenkins (Somewherepress@aol.com), October 11, 2000

Answers

This surging demand for chips stuff is interesting, but if you look at this thing from end-use on back, it makes for a different picture.

If more than 50% of American homes are now wired with computers, a slowing of demand is in order. So, how does all this match out?

-- JackW (jpayne@webtv.net), October 12, 2000.