It has now been over a week since AMD dropped the bombshell that it would be seeking to acquire ATI in a massive $5.4 billion dollar deal to be closed sometime in Q4 of this year.  Regardless of each company's current position in the market, the AMD/ATI merger has the potential to completely re-write the face of competition and a number of markets we cover on a regular basis.  It's a tremendous gamble on AMD's part, especially considering that much of the deal is in borrowed cash.  Whether this deal ends up being the smartest move AMD ever made or the beginning of the end has yet to be seen, and honestly at this point it's far too early to predict what will come out of it should the acquisition go through. 

While predicting isn't our forte to begin with, what we can do is present you all sides of the story.  We'll take you through the perspectives of AMD and ATI as well as NVIDIA and Intel, and conclude with a bit of our own analysis on the entire situation.  We'll start off with a bit of background information on the acquisition:

  • AMD plans on acquiring ATI for a total of $5.4 billion dollars in a mixture of cash and stock.  AMD will use $4.2 billion in cash ($1.7 billion currently on hand, and another $2.5 billion borrowed) and 57 million of its shares to pay for the deal.
  • The deal will close in the next 100 - 120 days, finalizing it near the end of 2006.
  • AMD isn't disclosing under what conditions it would walk away from the deal. 
  • According to AMD's Hector Ruiz, AMD is partnering with ATI to develop "integrated silicon where it makes sense".
  • AMD has no intention of blocking or prohibiting the sale of ATI products to anyone, but neither AMD nor ATI is counting on things like ATI Intel chipset sales continuing going forward. 
  • Current ATI roadmaps over the next 6 months will remain unchanged.
  • ATI's manufacturing arrangement (mainly ATI being a fabless manufacturer) will not change for the next 1 - 2 years.  The current production models will remain as-is. 
  • AMD doesn't believe that NVIDIA will alter its relationship with AMD; NVIDIA believes the same. 
  • Intel has not revoked ATI's bus license and has not made any public changes to its cross-licensing agreements currently in place with AMD and ATI. 

With the backdrop set, let's kick things off by looking at the merger from AMD's perspective. 

AMD's Position
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  • Zebo - Wednesday, August 2, 2006 - link

    No worries...AMD runs a tight, efficient company that is accustomed to surviving
    through very hard times. AMD survived for a long time making chips that were cheap and almost as powerful as Intel's best. If they have to fall back to that business model to survive, they will. I personally loved those days of $40-$80 chips. But that's not realistic considering where AMD has been, their name and market presence currently, products on the table.. AMD is a mainstream player now with good reputation and large OEM's building thier boxes with them. They aint going anywhere.
  • poohbear - Wednesday, August 2, 2006 - link

    so if the deal goes through, will the ATI brand name disappear? will we see AMD graphics cards instead of ATI graphics cards?
  • Sunrise089 - Wednesday, August 2, 2006 - link

    IMHO there would be no reason to abandon the second most valuable GPU name. When Ford bought Aston Marton they didn't suddenly rename the products things like Ford DB7.
  • erwos - Wednesday, August 2, 2006 - link

    Let me toss out a few random thoughts. I'm more of an economist than a businessman, but I took enough banking and finance to know enough to hurt myself.

    Almost all huge corporate mergers are not huge successes. Indeed, most of them tend to be failures unless the businesses are _very_ similar (gold mining company A buys out gold mining company B). My favorite example is Novell buying out SuSE and Ximian - everyone's doing operating systems, yet the best you can say was that it wasn't a complete failure. Certainly, the promised benefits haven't really emerged. Another good example is AOL and Time Warner.

    The bad news here is that ATI and AMD are in two different sections of the industry, and that for the proposed benefits of this merger to work, they're going to have to integrate very tightly. To make things worse, the benefits of integration aren't all that clear. GPU on a CPU? Who's been asking for that? It has certain implications for the embedded market (think Geode and system on a chip applications), but they hardly needed to buy a company the size of ATI to accomplish that particular goal. And it couldn't be to hand ATI the better fabs, either - as Anand pointed out, AMD isn't going to have any extra fab space in the medium-term outlook.

    My prediction: ATI-AMD will spend the next 9 months after the merger at _vastly_ decreased efficiency. Intel and nVidia will both be able to exploit this and take definitive leads in technology, at least for a while. In the long-term, ATI-AMD's dedication to high-end GPUs will fade, because the former-AMD executives running the company have absolutely no experience in the field. I am pessimistic, because, unfortunately, that is the historical truth.

    Personally, I think that if GPU on a CPU becomes the prevailing way to go, nVidia will just buy out VIA or Transmeta. And they'll probably have just the same problems as ATI and AMD will have, too... But there's no reason to toss those problems on yourself until you have to, and there was no really compelling reason for AMD to buy ATI at this moment in time.
  • Kim Leo - Wednesday, August 2, 2006 - link

    what are you talking about? ok its fine to comparte other situation like this, but AMD didnt buy ATI just for the "intergrated graphics in CPU" idea and even though Hector Ruiz dosn't have too much experience in this sector but ATI's CEO who will still be there does, and i don't think that AMD won't listen to what he has to say about it. I think this will be great, AMD and ATI will both benefit from this, they both get technologies that can be used in their own products
  • erwos - Wednesday, August 2, 2006 - link

    There aren't two CEOs. There's one, and his name is Hector Ruiz. At best, ATI's CEO will get pushed into director of the graphics division. More to the point, AMD's the much bigger company, and it's more likely their corporate culture is going to dominate ATI's. ATI's CEO's opinion will matter, but it's not going to sway AMD like it did/does ATI.

    If the plan isn't to integrate GPUs on CPUs, what other benefit was there to acquiring ATI? What techologies is ATI going to give AMD, and vica versa?

  • Sunrise089 - Wednesday, August 2, 2006 - link

    Couldn't the desire to purchase a healthy company with a high profit margin in a fast growing industry be a benefit? I think everyone is too focused on integration in the short term. AMD had $$$, $$$ is there to spend or invest, and if the bean-counters at AMD think the ROI for buying ATI is higher than investing in a new fab or whatever than they make that decision.
  • JarredWalton - Wednesday, August 2, 2006 - link

    The major benefit seems to be AMD getting a company with a reasonable chipset business, and they can work that to create better business platforms, thus helping to penetrate the lucrative business sector. Except, penetrating the business sector is extremely difficult, especially the corporate world. "Buy Intel and Dell" is the standard decision, and even if Dell isn't picked, almost all businesses buy Intel systems. They did this all through the "NetBurst failure", so why would they change now that Intel has a good chip again (Core 2)?
  • yacoub - Wednesday, August 2, 2006 - link

    So will we see a reference cooler design on future ATI cards that is less noisy than the silly thing on the X1800/X1900 series? ;P
  • jones377 - Wednesday, August 2, 2006 - link

    In Q106 the marketshare breakdown for all x86 chipsets were as follows....

    Intel 57%
    VIA 15%
    ATI 12%
    Nvidia 9%
    SiS 6%">

    Different breakdown for Intel and AMD platforms. Basically Nvidia has almost no share in the Intel platform market while ATI sells in both.

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