AMD Sells Digital TV Business to Broadcom

Advanced Micro Devices has agreed to sell its underperforming Digital Television (DTV) business to Broadcom for $192.8 million, the two companies announced Aug. 25.

The deal, which is expected to close sometime in the fourth quarter of 2008, is a significant step forward for AMD, which has suffered through seven straight losing financial quarters and has been looking for buyers for its underperforming Consumer Electronics group for months.

When AMD bought ATI in 2006 for $5.6 billion, it inherited the graphic maker’s consumer electronics division, which has underperformed for AMD since it completed the deal. Just before AMD announced its second-quarter financial results in July, the company announced it would take an $880 million write down related to the ATI acquisition and then AMD essentially shutdown the consumer electronics division.

The Broadcom deal now allows AMD to move the ATI DTV business off its balance sheet, which should help with the chip maker’s financial recovery. The DTV business sell-off also makes good a promise that AMD would refocus its energy on its core x86 processor and graphics business, which new CEO Dirk Meyer announced when he took over the company in July from Hector Ruiz.

“The sale of our DTV business is a key step in AMD’s transformation, helping to strengthen our balance sheet, lower our breakeven point, and hone our focus in order to take full advantage of our position as a leader in both microprocessors and graphics technology,” Meyer said in a statement released after the Broadcom announcement.

John Spooner, an analyst with Technology Business Research, said the sale of the DTV business will have an immediate impact on AMD by adding much needed cash into AMD’s coffers. It will also allow AMD to cut expenses by reducing the company’s overall headcount by about 500 employees and reduce any money spent on research and development. In the long term, the sale puts AMD on track to return to its roots as a producer of x86 processors for servers and PCs as well as a supplier of GPU (graphics processor unit) technology.

“This is something that will really let them focus on their core PC and graphics business,” Spooner said. “That’s what the executives talked about earlier this year. With the digital television business, the guys would come up with cool products and then they would have to go out and find a market to sell these products into. It was a good business, but it was peripheral to what AMD wanted to get done. Now, this gets them more focused on PCs and servers.”

In addition to the DTV business, AMD is also looking for a buyer for the mobile handset division that also belonged to the ATI Consumer Electronics division. A third part of the electronics division, which involved graphics technology for game consoles, has already been absorbed into the main ATI graphics division.

The agreement to sell the DTV business can also be seen as a strategic move in anticipation of AMD’s “asset smart” or “asset lite” strategy. While not directly related to the sale, the "asset smart" plkan has been rumored for months but remains a closely guarded AMD secret that Ruiz said he would focus on as chairman of AMD’s board, while Meyer runs the day-to-day operations. Although AMD has said little about “asset-smart,” industry watchers and analysts believe that AMD will sell off its manufacturing facilities or fabs and that Ruiz will head up this new venture.

For Broadcom, the acquisition of AMD’s DTV business means that the company can further expand its research into home entertainment and digital television technology. The deal will allow Broadcom to tap into processors, reference designs and integrated circuits for digital televisions, television panels, home theater systems and digital speakers.

“The acquisition of AMD's DTV business, which will become the core of Broadcom's DTV line of business, will enable us to significantly scale and accelerate the completion of our digital TV product portfolio while also expanding our tier-one customer base and positions us to achieve leadership and long-term growth in this important market segment,” Broadcom Senior Vice President Daniel Marotta, said in a statement.

What is less clear is what will happen to the 530 employees of the AMD DTV business. In the statement, Broadcom and AMD announced that these employees “will be invited” to join the new Broadcom division.

Since its financial fortunes have declined, AMD announced that it would eliminate about 10 percent of its 16,500 employees.

Although AMD has struggled in the last year, several of the company’s top spokesmen set up shop outside the 2008 Intel Developer Forum earlier this month to tout the company’s upcoming line of processors and its graphics. Just before IDF, AMD announced that it would use its 45-nanometer “Shanghai” processor to compete against Intel’s Nehalem chip in the two- and four-socket server space and that it will have a new server platform hit the market by 2009.

Doug Freedman, an analyst with Amercian Technology Research, wrote in an Aug. 25 research note that AMD could have a Shanghai announcement ready by the third quarter. AMD executives had said that the chip could hit the market by the fourth quarter.

"We anticipate key product launches before the end of the current [third quarter] for Shanghai server processors [making up for Barcelona mis-steps]," Freedman wrote. "We expect Shanghai performance reports to leak in the next week or so. While we don't expect top-of-the-pyramid performance, we expect more than good enough for many mainstream server and high-end desktop configurations."

Editor's note: This article was updated to include comments from analysts.