News

AMD To Buy Graphics Chip Maker ATI

• By The Associated Press
• July 25, 2006

The acquisition of ATI Technologies Inc. will allow AMD to shed its role as a boutique player that sells only microprocessors, which act as the core calculating engines in PCs. Almost immediately, AMD will become a seller of chips in four new categories, eroding a key advantage of Intel, which has long benefited from its broader product portfolio.

AMD over the past year has taken about 5 percentage points of market share from Intel thanks to a series of processors that in many cases outperformed and cost less than those of its larger rival. Monday's purchase, which comes as a trio of new products has allowed Intel to eliminate AMD's price and performance advantages, helps the smaller company to open a new front of attack, analysts said.

"It's one of the most disruptive and exciting things to happen to the PC industry in a very long time," said Jon Peddie of Jon Peddie Research. "It's a brilliant move on their part because they've scooped up an excellent company and they have a whole bag of products that Intel doesn't have."

AMD's new offerings will include graphics chips, which render images for computer games and Internet video, and so-called chipsets, which connect a PC's processor to other system components. AMD executives said they will win more business in the highly profitable processor market as they integrate video and other functions into those products.

Hector Ruiz, AMD's chief executive, said the purchase will also help the company gain share in the market for processors that run laptop PCs. Intel has long enjoyed an advantage thanks to the popularity of Centrino, a bundle of chips that's designed to reduce power consumption and extend battery life.

The combined company will be better able to take on Intel in the market for business PCs, which Endpoint Technologies Associates analyst Roger Kay said accounts for about two-thirds of overall microprocessor sales and has long been an Intel stronghold. ATI's popularity in Japan, another sweet spot for Intel, will also help AMD in that region, AMD executives said.

Under terms approved unanimously by both companies' boards of directors, Sunnyvale-based AMD will pay $4.2 billion in cash and 57 million of its shares to acquire all of ATI's outstanding stock. Based on AMD's closing share price of $18.21 on Friday, the deal valued ATI's shares at $20.47, a premium of almost 24 percent compared with ATI's Friday closing price of $16.56.

AMD, which had $2.5 billion in cash on hand at the end of June, said it planned to borrow about $2.5 billion to help pay for the purchase.

ATI shares surged $3.11, or 18.8 percent, to close at $19.67 on the Nasdaq Stock Market. AMD shares fell 87 cents, or 4.8 percent, to $17.39 on the New York Stock Exchange.

The transaction, which is subject to approval by Markham, Canada-based ATI shareholders and U.S. and Canadian regulators, is expected to be completed by year's end, AMD executives said.

Not all observers said the purchase was sound. Tom Smith, a chip analyst at Standard & Poor's Equity Research, downgraded AMD's stock on word of the acquisition.

"We are leery of the additional financial burden posed by the buyout," Smith said in an interview. "It's possible that you get more of a downturn than we or the Street expects for personal computers, and suddenly your revenue isn't there to cover the debt and you're backed into a corner."

The chief executive of Nvidia Corp., the other dominant maker of graphics chips, said ATI's coupling with AMD will strengthen his hand, because Intel, which sells about 80 percent of the world's microprocessors, will be loath buy graphics chips from a competitor.

"I doubt that Intel will work with AMD, so being in a position of neutrality and being able to support both processors with passion is pretty good for us," said Jen-Hsun Huang, Nvidia's chief, in an interview.

Nvidia shares closed up $1.79, or 10.1 percent, to $19.56.

But AMD executives dismissed the criticisms, saying the purchase will allow it to gain yet more market share. A gain of 1 percentage point translates to about $300 million in additional annual revenue, said Bob Rivet, AMD's chief financial officer.

"That number expands to hundreds of millions of dollars in (2008) and billions of dollars beyond the '08 period of time," Rivet said on a conference call. He said about 60 percent of the additional sales would go to gross margin, which is the amount of sales left after paying manufacturing costs.

The purchase also gives AMD entree to new markets as the company adds television tuners in PCs and graphics chips for cell phones and high-definition TVs to its product lineup. Intel, which in June sold a unit that makes chips for handheld devices, has had difficulty overtaking entrenched competitors in some of those markets.