Update: AMD to buy graphics vendor ATI for $5.4 billion

Acquisition will make AMD a top player in graphics chips

Advanced Micro Devices (AMD) has agreed to buy Canadian graphics chip vendor ATI Technologies for about $5.4 billion in cash and stock, the companies announced Monday.

AMD sees the merger as a way to offer integrated products for the mobile computing and consumer electronics markets, it said. From 2008, the combined company will develop closely integrated combinations of graphics and processing chips for data, graphics, media, and general-purpose applications, said Peter Edinger, ATI's vice president and managing director for Europe, the Middle East, and Africa.

The platforms will be differentiated by the relative power of the graphics and CPU units, and some may combine the two elements into single-chip products, he said.

The acquisition, which is subject to shareholder and regulatory approvals, would turn AMD into one of the world's largest providers of graphics chips. ATI reported net income of $31.9 million on revenue of $652.3 million during its fiscal third quarter, which ended on May 31. At that time, the company said revenue for the current quarter would be between $620 million and $690 million.

In the last fiscal year, a combined AMD and ATI would have made sales of around $7.3 billion, the companies said.

The companies expect the merger to save them $75 million in operational costs in the first year, and up to $125 million in the second year, without the need for job cuts.

"I do not expect there to be layoffs," said AMD chairman and chief executive officer Hector Ruiz in a conference call Monday.

ATI and AMD expect to complete the deal in the fourth quarter, subject to approval of ATI shareholders and U.S. and Canadian regulators.

Ruiz expects the integration of the company to go smoothly: "We have years of experience of working together. We share a common culture," he said.

Rumors that AMD would buy ATI have circulated for a couple months. If approved, the deal will add significantly to AMD's product line, bringing in a lineup of cutting-edge graphics chips and chip sets that include integrated graphics capabilities. Chip sets are the component on a PC motherboard that link a processor with main memory and other components, such as a hard disk.

These additions to AMD's product line will help the company better match rival Intel, which offers its own line of chip sets with graphics capabilities.

The acquisition of ATI will help AMD compete in the enterprise market, an area where it has lagged behind Intel, said Roger Kay, founder of Endpoint Technologies Associates, a computer industry research group. The commercial market represents about two-thirds of the total business, he said.

"Mainly AMD needs a platform to compete against things like Centrino and Viiv and vPro, which are the platforms that Intel has been creating," Kay said. "AMD was just a processor company."

AMD will be able to incorporate ATI's design and fabrication expertise more closely into its production capabilities, said Gordon Haff, a principal analyst with Illuminata, a technology research company.

Graphics processing is still about crunching data, and ATI's intellectual property could be applied to other forms of coprocessing, he said.

"AMD has really moved beyond creating clones of Intel processors," Haff said.

ATI makes revenue of between $80 million and $100 million a quarter selling integrated graphics chip sets for use on PC motherboards alongside Intel microprocessors, said ATI chief executive officer Dave Orton. That's around a seventh of its total business: the company reported total revenue of $652 million in the three months to May 31.

As Intel increasingly pushes its own graphics chip sets, AMD isn't counting on holding on to those sales: "We are making the prudent assumption that this business will disappear," Ruiz said. Nevertheless, he said, he expects motherboard manufacturers who are satisfied with the performance of ATI chips will continue to use them alongside Intel processors -- and, of course, AMD will continue to sell the chips for use alongside its own microprocessors.

AMD sees the biggest opportunities for future growth in microprocessor sales in the market for mobile PCs, Chief Financial Officer Bob Rivet said. Its strength is currently in the server and consumer PC segments, he said.

AMD officials said the deal doesn't threaten AMD's relationship with Nvidia, ATI's main rival in the graphics space and an important AMD partner, and it has no plans to lock out the company.

"We are going to keep our interfaces open to encourage people to use our platform," said AMD president and chief operating officer Dirk Meyer, contrasting the approach with that of main rival Intel.

AMD will take on new debt of around $2.5 billion to finance the deal. ATI has agreed to pay AMD a termination fee of $162 million if it backs out. The cash deal may have been favored by ATI since AMD's stock price has fallen, Kay said.

Jeremy Kirk in London contributed to this report.

Copyright © 2006 IDG Communications, Inc.

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