AMD's Acquisition of ATI

7/26 - AMD intends to acquire graphics chip and chipset maker ATI.

On the face of it, the acquisition may not seem like such a good idea: the union of a struggling graphics chip maker with a CPU company that has just lost its edge in the desktop and dual-processor server spaces.

However, Hector Ruiz (CEO, AMD) seems confident, and that confidence is in part based (according to Ruiz) on underlying forces in the industry. AMD's customers want AMD to play a bigger role in mobile computing and in business PCs. Just who those customers are, Ruiz doesn't say. HP? IBM? Sun? Others?

If there is a move afoot in the industry to put Intel in its place, then the acquisition may prove to be a very wise and far-sighted transaction.

The acquisition of ATI is to drive growth for AMD "in the commercial and mobile computing segments and in the rapidly-growing consumer electronics market".

So, in effect, AMD is taking aim at Intel's Digital Enterprise Group ("commercial"), Mobile Group ("mobile computing"), and Digital Home ("consumer electronics") divisions. In a word, AMD is taking aim at Intel's platforms.

The acquisition is a response to Intel's platform strategy, wherein Intel sells processors and other chips not separately, but together as a package, because (says Intel) the parts are optimized to work together. Intel currently has three platform initiatives underway: Centrino for notebooks, Viiv for the digital home, and vPro for business.

However, AMD hopes to put a different spin on platforms. Rather than slavishly imitate Intel's platform strategy, according to AMD, "this is totally different from what our competitor is doing in platforms".

Whereas Intel insists on the use of particular processors, particular chipsets, and other particular technologies, in conjunction with one another in order to wear Intel's platform brands, AMD shall release these restrictions and simply give their customers what they want.

That brings up the issue of quality control, which I'm sure AMD will address one way or another.

Whatever the terms of the acquisition, the deal signifies defeat for ATI. ATI is effectively throwing in the towel in its struggle with NVIDIA. ATI will go from being its own company, to being a business division of AMD. Once the sale is complete, ATI "will operate as AMD".

The acquisition puts the other graphics chip maker, NVIDIA, in somewhat of an awkward position. Their partner (AMD) is now their competitor. Oh well. What is it the Greeks say? Love as if you will thereafter hate, and hate as if you will love?

AMD says that they want to keep doing business with NVIDIA. Perhaps this means that AMD shall cede the graphics high end to NVIDIA. This would in essence give NVIDIA a monopoly in that space. If you thought that prices were high before, look out!

By acquiring ATI, AMD has seized an opportunity. The combined company looks good on paper. The transaction appears to be well thought out. AMD is not trying to camouflage an inability to grow and trying to buy growth. On the contrary, the company has been growing by leaps and bounds. All of this bodes well.

AMD needs penetration of the mobile computing market more than anything else. This will give it to them.

Moreover, buying ATI gives AMD something Intel doesn't have. Intel already has integrated graphics, but the acquisition gives AMD discrete graphics as well. And video technology: inroads not just into computing, but into the world of CE and high definition and hand-held displays.

Nevertheless, the acquisition is frought with risk. Most acquisitions of this size, to tell you the truth, do not pan out. That's why companies' stock tends to take a nose-dive after large acquisitions of this sort. By the end of the year, AMD will be about 4 billion dollars in debt. If the company fails to execute, things could turn ugly.

However, with risk sometimes come rich rewards. If anyone can pull this off, that company would be AMD.

Sources: AMD & ATI: A Processing Powerhouse, Press Release, Investor Presentation, Strategic Vision Presentation, Fact Sheet, Webcast, FAQs, Conference Call Transcript

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