AMD Buying Graphics Chip Maker ATI

Processor designer and manufacturer AMD announced today that it plans to purchase graphics manufacturer ATI for roughly $5.4 billion. According to AMD, the combined companies will create a “processing powerhouse” by melding AMD’s microprocessor expertise with ATI’s skills in graphics processing, chipsets, and consumer electronics. The deal involves $4.2 million in cash and approximately 57 million AMD shares in a bid to acquire all of ATI’s outstanding stock; AMD is financing the deal with help of a $2.5 billion loan from Morgan Stanley. The deal has been approved by the boards of both companies.

“ATI shares our passion and complements our strengths: technology leadership and customer centric innovation,” said AMD Chairman and CEO Hector Ruiz. “Bringing these two great companies together will allow us to transcend what we have accomplished as individual businesses and reinvent our industry as the technology leader and partner of choice. We believe AMD and ATI will drive growth and innovation for the entire industry, enabling our partners to create differentiated solutions and empowering our customers to choose what is best for them.”

AMD’s product offerings have largely been limited to CPUs as the company has challenged the dominance of Intel on both price and performance fronts. Conversely, ATI has never focused on microprocessors which act as a computer’s main engine; instead, the chipmaker has centered its business on chips which control graphics as well as semiconductor solutions used in consumer products like high-definition televisions and mobile devices. AMD also plans to integrate the companies’ technologies into new types of processor products, according to AMD’s statement, and plans to develop “platforms that integrate microprocessors and graphics processors to address the growing need for general-purpose, media-centric, data-centric, and graphics-centric performance” by 2008.

The deal would diversify AMD’s product offerings, potentially making it less vulnerable to price cuts from rival chipmaker Intel, and may pose a challenge for other graphics chip makers like Nvidia, which now have to compete with a much larger company with a major foothold in the graphics controller market. But all may not be rosy near-term: AMD has been forced to slash prices on it microprocessor products by as much as 57 percent in anticipation of Intel’s forthcoming Core 2 Duo processors, which seem to offer better performance than AMD’s offerings. Both AMD and Intel missed earning estimates with their second quarter results; Intel specifically blamed lower average selling prices for processors as a reason for its shortfall.