AMD will buy graphics vendor ATI for $5.4bn

Advanced Micro Devices (AMD) has agreed to buy Canadian graphics chip vendor, ATI Technologies, for about $US5.4 billion in cash and stock.

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 would develop closely integrated combinations of graphics and processing chips for data, graphics, media and general-purpose applications, ATI's vice-president and managing director for Europe, the Middle East and Africa, Peter Edinger, said.

The platforms would be differentiated by the relative power of the graphics and CPU units, and some might 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 $US31.9 million on revenue of $US652.3 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 $US620 million and $US690 million.

In the last fiscal year, a combined AMD and ATI would have made sales of around $US7.3 billion, the companies said.

The companies expect the merger to save them $US75 million in operational costs in the first year, and up to $US125 million in the second year, without the need for job cuts.

"I do not expect there to be layoffs," AMD chairman and CEO, Hector Ruiz, said.

ATI and AMD expect to complete the deal in the fourth quarter, subject to approval of ATI shareholders and US 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 chipsets that include integrated graphics capabilities. Chipsets 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 would help AMD compete in the enterprise market, an area where it had lagged behind Intel, founder of computer industry research group Endpoint Technologies Associates, Roger Kay, said. The commercial market represented 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," he said. "AMD was just a processor company."

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

Graphics processing was 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 made revenue of between $US80 million and $US100 million a quarter selling integrated graphics chipsets for use on PC motherboards alongside Intel microprocessors, ATI CEO, Dave Orton, said. That was about a seventh of its total business: the company reported total revenue of $US652 million in the three months to May 31.

As Intel increasingly pushes its own graphics chipsets, 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 expected motherboard manufacturers who were satisfied with the performance of ATI chips to continue using them alongside Intel processors -- and, of course, AMD would continue to sell the chips for use alongside its own microprocessors.

AMD saw the biggest opportunities for future growth in microprocessor sales in the market for mobile PCs, chief financial officer, Bob Rivet, said. Its strength was in the server and consumer PC segments, he said.

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

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

AMD will take on new debt of around $US2.5 billion to finance the deal. ATI has agreed to pay AMD a termination fee of $US162 million if it backs out. The cash deal might have been favoured by ATI since AMD's stock price had fallen, Kay said.

(Jeremy Kirk in London contributed to this report.)

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Peter Sayer and Sumner Lemon

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