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 News.com, 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).

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