AMD purchases ATI

Steve Weigle is the Founder and President of The Village Geek

AMD to shell out $5.4 billion for ATI

AMD announced last week that they would purchase ATI, the graphics chip manufacturer.

I'm reminded of a prize fight where the underdog has been taking a beating for eight rounds and suddenly staggers the champ with a surprise right hook. The seemingly beaten boxer suddenly comes alive and goes after the Champ with a fury that no one would have expected and often ends the fight in an upset victory for the challenger. The fighter taking the beating sometimes refers to his method as the Rope-A-Dope.

AMD delivered the surprise blow in recent months when they took a bigger portion of the server market from Intel with high end processors that outperformed the Champ's chips while using less energy. Intel is poised to make a come back with high performance, low power chips of their own. But with this merger AMD has gone after the staggering giant with a move that no one expected.

You see the major manufacturers have established partnerships with each other in order to survive in the cut throat world of PC chip manufacturing. In the old days there were 7 or more major video chip manufacturers and several motherboard chip manufacturers (as well as a variety of manufacturers of other chips for sound, modems and so on). But in a world where manufacturers sell chips in quantities of 1000 for a price within $1 to $2 of the final retail price, there is no room for error. Chip manufacturers have failed, or merged until now there are only two video chip manufacturers and two major CPU manufacturers left (for PC’s). Both of the video chip manufacturers have attempted to make motherboard chips, and Nvidia, ATI’s main rival has been successful in that market.

AMD works hard to farm out the motherboard chip manufacturing and as a result companies like VIA and Nvidia are successfully competing as motherboard chipset manufacturers. Interestingly VIA bought the last of the small video chip companies and the last two small processor companies a few years back. But they use these chips on their own boards and make no real effort to compete in the CPU or Video card markets.

The point is the partnerships. You see Nvidia makes motherboard chipsets only for AMD products. And Intel has relieved their capacity woes by contracting out their video chips to ATI.

So, if AMD owns ATI, does Nvidia continue to supply motherboards and integrated video chipsets for AMD processors? Does Intel switch to Nvidia for their onboard notebook graphics?

It seems to me that this move by AMD goes way beyond the merger of two companies. It looks like a direct blow to the head of Intel.

Intel has had serious problems producing enough inventory to supply the products they promote. Every year they announce exciting new products, but once the initial batch is delivered we all find that there is no inventory at the distributors for us to buy. By the time they get the product “ramped up” it is year end and they introduce the next year’s new exciting products and the cycle repeats. This year they announced that they had solved that problem by building new manufacturing plants, and by partnering with ATI to produce their notebook graphics. They told us the new plants would be online by the end of the year (not in time for the new exciting products they just released). They also told us they knew AMD had outperformed them and that they were ready to strike back with this new line of processors.

Here comes the flurry of blows from the challanger:

On July 24th Intel announced that they had discontinued a huge portion of their product line in favor of their new chips, and that they would drop the prices of the existing products dramatically, to blow out the entire inventory of the old lines.

(Editor’s note: Watch for super bargain deals from Dell, Compaq and HP in the next weeks. They typically offer systems built with obsolete technology at absurdly low prices with television ads that conveniently mask the truth about the processors and warranties.)

On July 24th (the same day) AMD announced a massive price drop that promises to force Intel’s prices even lower.

Again on July 24th, AMD announces the ATI purchase. They claim the purchase is intended to help them in the mobile market.

Well, yeah…. Intel will not be able to keep up with demand for notebook motherboards because they will be forced to redesign them all without the ATI chipsets. And if Intel can not produce enough processors for those notebooks (because they have to shift their focus at least partially away from processor production), then AMD is looking pretty when it comes to the mobile market. Moreover, Intel’s just issued VBI notebook program uses ATI graphics chips. Intel has committed to buying over a million of those notebooks with the current ATI based design.

At first I thought that AMD was hurting themselves by forcing Nvidia out of the motherboard business. But then I realized that Nvidia would be bankrupted if they suddenly stopped production of their extremely popular motherboard chipsets. For the time being they have no choice but to continue to support AMD (AMD says they plan to continue their relationship with Nvidia). Intel will have no choice but to switch to Nvidia or use their own video chips, which as I already pointed out, they do not have enough capacity to build.

Grab some popcorn, and get a ring side seat. This is going to get interesting.

-Steve Weigle

Advanced Micro Devices plans to acquire graphics chipmaker ATI Technologies for $5.4 billion, a move intended to increase AMD's mobile-computing and consumer electronics capabilities, and help battle archrival Intel.

AMD will pay $4.2 billion in cash and issue 57 million shares of common stock to ATI shareholders. Through the acquisition, announced Monday, AMD is looking to expand its efforts in high-growth markets such as consumer digital media and mobile computing, and to bolster its position with large corporate customers.

"This strategy has been in the making for a number of years and culminated with the ATI acquisition," Hector Ruiz, AMD's chief executive, said during a conference call with analysts. "Visual computing is playing a larger role in what we are doing, going forward."

AMD's Opteron family of processors has taken market share from Intel in some areas, though Intel still dominates the overall market and offers chipsets with integrated graphics capabilities.

ATI will add graphics chips and chipsets to AMD's offerings. AMD is also hoping that ATI's strong presence in mobile computing will enhance its desktop business.

Beginning in 2008, AMD aims to create chip platforms that integrate microprocessors and graphics processors. The company plans to develop these chips for use in media, data, graphics and general-purpose devices.

After the ATI announcement, Standard & Poor's placed AMD on its CreditWatch with "negative" implications. S&P's rating service, which lists AMD with a B+ corporate credit rating, cited concern that ATI could find access to Intel's product plans constrained, should the deal go through.

"We will meet with management to assess the effect of the acquisition on AMD's financial profile, the near-to-intermediate-term changes in the graphics chipset industry dynamics, and the company's longer-term position in the personal-computer and consumer electronics processor industries," according to S&P's statement.

AMD's shares were down 4.8 percent to $17.37 a share in midday trading.

One financial analyst, however, applauded the deal.

"It's an innovative idea and a pretty visionary way for them to take their business," said Eric Gomberg, an analyst at Thomas Weisel Partners.

Following the merger, AMD would have the capability to optimize ATI's chipset with its microprocessor, Gomberg noted. And with an expanded breadth of AMD products, Dell may be interested in signing on with a wider spectrum of purchase orders, he added.

Gomberg noted that AMD has a track record in integrating technologies, showing an aptitude in integrating its microprocessors with memory controllers.

Partnerships and competitors
The companies' current partnerships may become an issue in the future. AMD partners with ATI rival Nvidia for graphics chips, while ATI is an Intel partner.

AMD said it expects to continue its partnership with Nvidia, offering customers a choice of two graphics technologies. ATI, meanwhile, plans to continue with its existing product road map for the next six months, which includes "ramping up" on the Intel side.

Intel, meanwhile, is evaluating the pending merger and its possible effect on its partnership with ATI.

"We won't change anything until we learn a lot more about this transaction," said Chuck Mulloy, an Intel spokesman.

Such a complaint may fail to get regulators' attention, given that Intel will remain a dominant player even after an AMD-ATI merger, Gomberg said.

The pending merger is expected to have little effect on Nvidia's graphics-processing (GP) business strategy, said Derek Perez, an Nvidia spokesman.

"Their merger lends to our strategy nicely," Perez said. "We want to be the GP provider for everything that needs a GPU (graphics-processing unit). After the merger, we'll be the only large, independent GP provider."

AMD chose to acquire ATI over Nvidia for several reasons, said Patrick Moorhead, vice president of advanced marketing at AMD.

"ATI is a leader in notebook graphics and...notebook chipsets, as well as a leader in notebook-discrete graphics," Moorhead said. "We think we compliment one another. They're strong in notebooks, and we're strong in the consumer desktop...culturally, we fit together great. We're both partner-focused and customer-centric."

Although the pending merger will bring AMD and ATI under one roof, there are no plans in the near future to combine the manufacturing of AMD and ATI chips into an integrated foundry, Ruiz said.

He noted that microprocessors are manufactured using more mainstream techniques than those required for graphics chips. Both companies are currently facing challenges meeting their existing manufacturing needs, AMD and ATI executives said.

Talk of a merger between the two companies first emerged in May. Over the weekend, the rumors intensified, until it was almost considered a done deal on Sunday.

Many industry analysts have said it made little financial or strategic sense for AMD to buy ATI outright. But AMD, the No. 2 supplier of processors, said it will use the purchase of Markham, Ontario-based ATI to expand its product mix and its market share as it battles No. 1 Intel.

The deal is expected to close in the fourth quarter and lead to combined annual sales of $7.3 billion. The company expects to have a combined work force of 15,000.

AMD has obtained a $2.5 billion term loan commitment from Morgan Stanley Senior Funding which, together with combined existing cash, cash equivalents and short-term investment balances of about $3 billion, provides full funding for the acquisition, the chipmaker said. The deal is subject to the approval of ATI shareholders, as well as regulators in the United States and Canada.