AMD-ATI: A Done Deal

The official AMD-ATI announcement is still three hours away, but AMD sent the newswire out a few hours early.  For those still in doubt, occasional Global Tech News blogger and T-Break Editor-In-Chief Abbas Jaffar Ali was able to sneak an image from the conference already; and a picture is worth a thousand words.

AMD announced the deal is valued at around $5.4B USD: $4.2B in cash and 57M shares of AMD common stock (valued at a little over $18 USD per share as of July 21, 2006) will be used to purchase the ATI in a takeover bid.  A little more than half of the cash to be used from the transaction will come from a $2.5B USD loan from Morgan Stanley, which was the bank quoted Saturday when the news of this story first broke.  This is in addition to the $5.8B USD the company plans to invest in Dresden, Germany over the next three years and the $3.5B USD slated for a new semiconductor facility in Luther Forest, New York.  ATI was a fabless semiconductor company, meaning the company relied completely on third-party facilities to manufacture its ASICs. Although AMD certainly will have semiconductor fabrication, the company is already hard-pressed to keep up with CPU demand.  AMD President Dirk Meyer emphasized that AMD will not use its in-house facilities for ATI semiconductors at this time, especially with the TSMC and UMC opportunities that are already available.

AMD’s press release also claims that the combined company would have had approximately $7.3B in sales over the last four quarters and just under 15,000 employees.  The new company keeps the AMD headquarters in Sunnyvale, California, and the previous ATI headquarters will act as a business hub for part of the company.  ATI’s previous CEO Dave Orton will act as executive vice president of the ATI division and report directly to Hector Ruiz and Dirk Meyer.  AMD’s press release indicates that ATI will, for now, act as a division of AMD.  In the event the takeover falls through, ATI must pay AMD a termination fee of $162M to cover AMD’s initial investments and lendings. AMD CEO Hector Ruiz also confirmed that there will not be any significant layoffs as a result of the takeover.

The merger is more than a small shakeup for the industry.  NVIDIA, AMD’s number one supplier of core logic for AMD platforms, is also a direct competitor of ATI for discrete and integrated graphics.  Jaffar Ali was able to reach NVIDIA’s Director of Product PR EMEA, Luciano Alibrandi, who claims “Our PC strategy is to be the leading innovator of GPU and core logic for both Intel and AMD platforms. GeForce is the #1 GPU brand. Quadro is the #1 professional and workstation graphics brand. nForce the #1 core logic brand. And SLI is the #1 multi-GPU brand. They are specifically sought out by end users of both Intel and AMD processors. Today’s announcement only enhances our strategy.”  It appears definite that NVIDIA will approach the Intel market with much more vigor than in the past, though no NVIDIA representatives would comment on whether or not the merger will result in a scaling back of NVIDIA AMD components.  AMD President Dirk Meyer added “With regard to GPUs: I fully expect ATI’s solutions to compete with NVIDIAs on the AMD platform.”

Microsoft had already voiced its opinion in the AMD press release when Jim Allchin, Co-President of Microsoft’s Platforms and Services Division, claimed “We’re excited by the potential of what AMD and ATI can deliver together to enhance the Windows Vista experience for our customers even further.”  Since it may take years for the AMD takeover to really kick into effect, it may take some time for customer-ready products to hit store shelves.

The addition of in-house core-logic also strengthens AMD’s presence in the server market.  A portfolio manager for AMD, who wishes to remain nameless for now, told Global Tech News “[I] doubt AMD will have the price flexibility to bundle ATI chipsets (18% gross margin) until they bring the manufacturing in-house. Available capacity for that is still down the road.”  The same manager went on to claim that without total reliance on Broadcom for server core-logic the company will have much better success securing major deals for large quantities of server products.  All of these products will now be obtained through the single AMD channel instead of multiple vendors — the company previously prided itself in diversification of channel solutions until the Dell picked up AMD to provide server products.

The deal still needs to receive approval from the AMD and ATI shareholders, and then pass FTC and Canadian Competition Bureau approval. AMD recently announced that the company would cut back its Geode research, while almost simultaneously selling the AMD Alchemy division.  This departure of low-end x86 and non-x86 presence is in stark comparison to ATI’s recent purchase of Bitboys Oy.  Many of the Alchemy processors AMD recently spun off competed (at least indirectly) with ATI Imageon products — many of which will show up in the new Nokia devices and digital TVs. AMD will also gain a significant presence with the Microsoft XBOX team, as ATI designed the XBOX 360 graphics processor and the XBOX 360 HD DVD H.264 decoder.