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Advanced Micro Devices will acquire graphics processor maker ATI Technologies in an effort to emerge as a more formidable supplier of chips for business computers.
AMD has traditionally worked with multiple partners whose chips can be used with its processors to build PCs. But the company intends to use the tie-up, announced on July 24, to deliver more tightly integrated processors and supporting chip sets, in an effort to lure more businesses.
AMD has made strides with businesses of late, particularly in the server space. Its Opteron server chip has claimed more than a quarter of server processor shipments, thanks to partnerships with companies such as Hewlett-Packard, IBM and Sun. It has also won major PC deals. However the company—whose goal is to serve at least one third of the PC processor market in the future—says it still needs to do more to gain businesses loyalties in corporate PCs, a market where Intel continues to dominate.
“Mobility and commercial are [the] most immediate areas for growth” for the combined AMD-ATI entity, Hector Ruiz, AMDs CEO, said during a conference call with analysts. “For us to be able to [grow in those areas], the one thing our customers were insisting on is we had to play a bigger role in the ecosystem of those products.”
Customers were essentially asking for AMD to strengthen the ties between its processors and their supporting chip sets and graphics processors and take a more active role in the way the resulting systems are designed and tested, all things it can do with ATI on board, Ruiz explained.
“Therefore, ATI is a perfect match to the needs for which customers have been asking us for some time,” he said.
Indeed, the deal, valued at $5.4 billion, will allow AMD to combine its processors and ATIs graphics chips and chip sets, supporting chips that handle PCs input/output functions, to create entire PC platforms to offer to its PC maker customers. The combined company would have achieved approximately $7.3 billion in total sales during the last four quarters.
To be sure, AMD will continue selling discrete ATI graphics processors and continue supporting open technology standards. It will do nothing to discourage PC makers from combining its products—either processors or ATI chip sets—with those from other companies, particularly Nvidia. Nvidia, ATIs chief rival in graphics, sells chip sets and graphics processors that work with both Intel and AMD processors. Nvidia and Broadcoms Serverworks are major supporters of AMDs Opteron server chip as well. AMD executives said it was too soon to comment on an in-house, ATI-designed Opteron chip set.
AMD doesnt intend to discourage the use of Intel processors on ATI chip sets, either. Although executives say that the company has accounted for the fact that ATIs Intel business may evaporate, ATI will continue to make and sell chip sets for Intel processors until the deal closes in the fourth quarter.
Instead, AMD will tout a better marriage between AMD and ATI products, particularly in the future. Simply working more closely will allow for better product designs and testing, AMD executives said.
However, during 2008 and beyond, the combination of the two companies will allow for all-new products. Some will integrate AMD processors and ATI graphics engines on a single chip. Others will combine technologies from the two to create new types of processors, Dirk Meyer, AMDs president, said during the call.
“As we look toward ever finer manufacturing geometries we see the opportunities to integrate CPU [central processing unit] and GPU [graphics processor unit] cores together on a single die to serve some segments,” Meyer said. “In the long term, we see the opportunity to leverage both [CPU and graphics] technologies on a per-application basis.”
Next Page: Lower-cost business PCs on the horizon?
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The result could be lower-cost business PCs that take advantage of chips that include a CPU and graphics capabilities or, later, PCs tuned for specific jobs, such as processing data or for multimedia. It could also seed PC technology—namely x86 processing capability—into new types of devices for consumers as well.
The deal, expected to close in the fourth quarter, will establish ATI as a business division at AMD. David Orton, ATIs CEO, will become executive vice president of the ATI business division, reporting to the AMD Office of the CEO, which includes Ruiz and Meyer. AMD will continue to maintain a facility in Markham, Ontario, where ATI is based.
Under the terms of the deal, AMD will acquire all of the outstanding common shares of ATI for a combination of $4.2 billion in cash and 57 million shares of AMD common stock, based on the number of shares of ATI common stock outstanding on July 21. AMD will borrow a portion of the cash.
The deal is also subject to regulatory approval in the United States and Canada. ATI shareholders must also approve of the deal.
Thus, for the time being, its business as usual. ATI will continue to deliver new products this year, Orton said.
However, Orton and Meyer will head an integration team, charged with combining the two companies.
AMD expects that buying ATI will be slightly accretive to its 2007 earnings. AMD also anticipates that it will reduce operating expenses by approximately $75 million for the combined company by the end of 2007 and by $125 million in 2008.
Although Ruiz said he expected few layoffs would result from merging the companies.
“This acquisition is about growth and creating value,” he said. “I dont think the word layoffs can apply in this particular context.”
Editors Note: This story was updated to include information and comments from a news conference with analysts.
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