Sunnyvale (CA) and Markham (ON) – AMD bets $5.4 billion on its future: The company today announced that it will acquire ATI to “fight against the monopoly” and to create application specific platforms in the commercial, mobile and consumer electronics segments. AMD also said that, within two years, the company wants to offer processors that integrate graphics functionality.
Early Monday, AMD confirmed acquisitions rumors that circulated over the past few weeks on the Internet: During a conference call, AMD and ATI unveiled their plans to merge the two firms into a new “processing powerhouse.” According to AMD chief executive officer Hector Ruiz, ATI is the “best partner for innovation and choice” for AMD and will enable the company to create platforms and solutions its “customers have been asking for.”
AMD said that combining the two companies will open up new growth opportunities “especially in the microprocessor space” and will reduce redundancies with ATI. According to AMD’s chief financial officer Bob Rivet, the ATI acquisition will enable the two firms to save about $75 million in areas such as administration this year and up to $125 million next year.
Immediate technology synergies between the two companies are seen in the chipset space: While AMD had to wait for third-party developers to come up with hardware and software to support products such as its Turion 64 mobile processor the company is now able to bring its own solution to the market right away: “We found it increasingly difficult to work with four companies to bring solutions to the market,” Ruiz said. “Working with just one will make it much easier.” Given this advantage, the executive believes that AMD has a better shot at the $17 billion commercial and notebook market.
The downside of acquiring ATI’s chipset business is the fact that Intel is currently ATI’s most important chipset customer and acquires a large number of its Xpress 200 chipsets for entry-level motherboards. According to Mercury Research, ATI shipped 8.2 million chipsets in the first quarter of this year, with 4.3 million units going into Intel products. Ruiz said that AMD makes the “prudent assumption” that ATI revenues originating from Intel shipments “will disappear over time.” According to ATI’s chief executive officer Dave Orton, ATI’s Intel specific product revenue [including chipset shipments] is about $80 to $100 million per quarter.
AMD hinted that ATI’s expertise in graphics may enable graphics functions that are directly integrated into the processor: “In 2008 and beyond, AMD aims to move beyond current technological configurations to transform processing technologies, with silicon-specific platforms that integrate microprocessors and graphics processors to address the growing need for general-purpose, media-centric, data-centric and graphic-centric performance,” AMD said in an early statement.
An interesting twist to the deal is that Nvidia, which has been one of AMD’s most important chipset partners in the past, will now become one of the key competitors of AMD. “We understand that and we welcome that,” said AMD president and chief operating officer Dirk Meyer.
Under the terms of the transaction, 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. AMD said it has acquired a $2.5 billion loan from Morgan Stanley, which, in combination with the firm’s current available cash and short term investments in the amount of $2.5 billion, will provide the funding to complete the deal. The acquisition is expected to close in the fourth quarter of this year.
The loan represents substantial new debt for AMD, which Rivet plans to pay back in “a reasonable amount of time.” The executive said that AMD’s current stock price did not provide the option for an all stock transaction.
Asked about possible layoffs, Ruiz mentioned that “this deal is about growth, not about destroying value.” While he expects to “address redundancies” he does not believe that layoffs will occur as a result of the merger. AMD currently employs about 18,100 people, ATI just over 2500.
In an immediate reaction to the announcement, investors sent AMD’s stock down about 4% to $17.50 in pre-market trading. ATI’s stock was up about 19% to 19.64.