Commentary: Advanced Micro Devices and Transmeta are planning to work together to give Intel fits in the server market. But they shouldn't stop there. The companies should merge. Watch AMD's partnership with Transmeta closely -- it may be just a sign of things to come. Under a complex deal yet to be announced, sources told CNET Networks that AMD is sending to software developers computers that run on competitor Transmeta's Crusoe processor and contain a special version of Transmeta's "code-morphing" software. The computers are designed to run a program that simulates AMD's upcoming server chip, called Sledgehammer, the sources said. That's big news in the tech world because the chipmakers have just enough tools to be a big threat to the Wintel juggernaut. Of course, we've heard about all these alleged giant killers before, but an AMD-Transmeta combination could be the real deal. AMD is dangerous on its own, but still can't upend Intel. Transmeta has nice technology, but the story is still a bit flimsy. Startups don't upend 800-pound gorillas named Intel. But if you put AMD and Transmeta together, you may have something -- a 600-pound gorilla. Let's speculate. Here's why an AMD-Transmeta marriage would work: They need each other. AMD has a good position in the consumer market and is gaining momentum in the corporate market. Transmeta is hoping that it can produce chips for laptops to keep thing rolling until information appliances become popular. AMD would give Transmeta a lot more room to work in the consumer space. Transmeta has a few deals, but it's hardly blanketing the industry. AMD could also use Transmeta technology to bolster its move into the corporate space. It's no coincidence AMD and Transmeta are working together on servers. Diversification. The two companies combined would fill some key gaps. AMD is reliant on flash memory (a very volatile market) and PC processors (a cyclical sector). Transmeta is banking on laptop processors initially, but doesn't have a lot of agreements with original equipment manufacturers (OEMs). Transmeta's real meal ticket -- information appliances -- may be years away. A merger would give the combined company diversification, but the type that would still keep AMD out of Intel's way. Intel has diversified its product line by focusing on communications chips and various side ventures. Transmeta has no shot on its own. Wall Street can cheer all it wants, but it's hard to see Transmeta staying independent. Technology is one thing, but making inroads in a sector dominated by AMD, Intel and others is another feat entirely. Merger talk may be premature for Transmeta -- it hasn't reported its first quarterly earnings yet -- but that's the best exit strategy. At best, Transmeta will be No. 3 in the chip world -- and no company strives for third place. Software. Transmeta's biggest value proposition is its embedded software, which can speed chips up and utilise Linux. If AMD acquired Transmeta, it could have legions of developers on its side -- especially if Linux godfather Linus Torvalds stuck around. And if you want to battle Wintel and win, you need developers on your side. The price will be right. Here's my hunch for Transmeta. Transmeta will report a hefty loss in its first quarter as a public company and have to deal with ugly topics such as slowing IT spending, falling PC sales and chip glitches. Wall Street is looking for a loss of 16 cents a share, according to First Call. Transmeta has a market capitalization of $2.7 billion, but that could come down if the company doesn't deliver some strong financials. AMD, which has $1.2bn in cash, could pounce when the price is right. The real trick would be making a deal accretive to earnings. Uncle Greenspan saves the day The Federal Reserve cut interest rates by a half of a percentage point and I'm already feeling better. I suddenly got the urge to:

• upgrade my PC
• get a new mobile phone
• visit a dozen e-commerce sites
• and buy some electronic gizmos.

Sounds ludicrous, doesn't it? Well it is. Fed Chief Alan Greenspan pulled the trigger, but it doesn't mean the tech sector's malaise is going away in minutes. Beware of the initial euphoria surrounding the rate cut. If Al's cut rates this dramatically, the economy must be slowing a lot faster than we thought. Stay tuned. See ZDII for US tech investor news. See techTrader for more technology investment news, plus quotes and research. Have your say instantly, and see what others have said. Click on the TalkBack button and go to the ZDNet News forum. Let the editors know what you think in the Mailroom. And read what others have said.