AMD's ATI purchase will yield long-term payout

AMD’s planned $5.4 billion merger with Canada-based graphics chip vendor ATI Technologies prompted some indignant sniffing about “desperation” among the technology sector’s chattering class. That kind of second-guessing is natural, especially on the heels of AMD’s decision to cut prices in half on some of its PC processors, which prompted similar action from Intel. But no matter what you’ve read, AMD’s CPU price cuts and its acquisition of ATI are not signs that the company is on a downward slide.

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First, the fuse on AMD’s price cuts was lit well before they were made public. AMD enjoyed lucrative margins on Turion 64 and Athlon 64 FX notebook and performance desktop CPUs, right up until the invitations went out for the July 27 launch of Intel’s Core 2 Duo 64-bit client CPU, code-named Conroe. The cannily timed price cuts of as much as 57 percent on AMD’s 64-bit desktop and notebook CPUs allowed AMD to crash Intel’s Conroe party last Thursday.

The purchase of ATI may go down as one of AMD’s most brilliant strokes yet. ATI is best known for GPUs (graphics processing units) used on 3-D and full-motion image-rendering PC video cards. ATI roughly splits that market with rival nVidia. But ATI is the stronger of the two vendors in mobile and motherboard-integrated GPUs, both big growth areas. ATI gives AMD an answer to the integrated graphics circuitry that Intel baked into its Core Duo and Core 2 Duo CPU support chip sets.

But ATI’s value extends beyond the graphics arena. ATI also makes chip sets for Intel- and AMD-based PCs. Since the debut of AMD64, AMD has left the chip-set business to third parties. Whereas Intel makes its own chip sets and controls the pricing and supply, AMD has been at the mercy of third-party chip-set pricing and delays, as well as performance and quality issues. The ATI and AMD deal doesn’t go before shareholders until later this year. Until then, ATI and AMD will be happily and profitably living in sin.