AMD to buy ATI for $5.4bn

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

AMD will pay $4.2bn in cash and issue 57 million shares of common stock to ATI shareholders. The acquisition was announced on Monday.

Hector Ruiz, AMD's chief executive, said during a conference call with analysts: "This strategy has been in the making for a number of years and culminated with the ATI acquisition. 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 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.

According to S&P's statement: "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."

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

One financial analyst, however, applauded the deal.

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

Following the merger, AMD will have the capability to optimise 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 AMD has a track record in integrating technologies, showing an aptitude in integrating its microprocessors with memory controllers.

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.

An Intel spokesman said: "We won't change anything until we learn a lot more about this transaction."

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, according to an Nvidia spokesman.

He said: "Their merger lends to our strategy nicely. 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.

Moorhead said: "ATI is a leader in notebook graphics and... notebook chipsets, as well as a leader in notebook-discrete graphics. 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, AMD's 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.

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

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

Reuters contributed to this report

Dawn Kawamoto writes for CNET News.com