AMD Takes the Long View

In one fell swoop Advanced Micro Devices has transformed itself from a microprocessor company into a broad-based technology firm that will be a major player in mobile computing, handheld devices and digital television.

The $5.4 billion deal for ATI, the subject of rumor for more than a month, was approved over the weekend.

AMD will acquire all the outstanding stock of ATI for $4.3 billion and 57 million shares of AMD common stock. ATI gets two seats on the AMD board and its senior management are expected to remain with the company.

On the flip side, AMD  and ATI  could also be seriously distracted trying to keep their new family together at the same time their two archrivals Intel and nVidia have highly competitive new products hitting the market.

The potential outcome of this merger depends on whom you ask, and there are agendas on all sides.

The potential for integrated graphics is enormous for AMD. Intel  uses a northbridge chip to access system memory, while AMD chips have the memory controller in the CPU.

To access an integrated graphics chip, the computer goes through the northbridge chip, so Intel builds its integrated graphics into the northbridge controller.

However, AMD will be able to build the integrated graphics into the CPU itself, since that’s where its memory controller is located. That means a cheaper solution to PC OEMs because it’s one less chip to buy.

AMD’s marketing architect Hal Speed said that will be a major benefit of the merger.

“Right away we are stepping up from being a component supplier to a true solution provider for our customers, and that’s what people are asking for,” he said.

One thing that is certain is AMD has a much broader product line with this deal.

“As of today, AMD sells processors, chipsets, integrated graphics, discreet graphics and integrated tuners for the PCs. AMD has met Intel in every market segment Intel is or has been in, with a broader ranger of products and decent marketshare,” said Jon Peddie, president of Jon Peddie Research, a market analyst who specializes in the graphics market.

In the meantime, where does this leave nVidia , a company with a regular licensing agreement with AMD (it provides chipsets for Athlon motherboards) that is only a few miles away from Intel in Santa Clara, rather than on the other side of North America?

nVidia isn’t worried.

“The only thing that changes is sensitivity to certain issues, because we know long-term they want to compete,” said Mike Hara, vice president of investor relations at nVidia.

“We’ve had the same relationship with Intel for the past decade. We know we’re a partner and a competitor. If AMD shows a desire to continue to work with us we’ll continue to do that.”

But in the end, Hara thinks putting the two companies together will distract them at a time when they can’t afford distraction.

“AMD and ATI have a lot on their plate because their competitors are coming to the market with new parts at the same time. We see it as a near-term opportunity, while they’re distracted, to put the hammer down,” he said.

Peddie said the deal puts nVidia in an ideal situation.

“They now will be the only independent GPU supplier who can provide GPUs to OEMs for either AMD or Intel platforms as well as providing it to Apple and Sony. They have no CPU bias or baggage,” he said.

nVidia provides the graphics processor for Sony’s forthcoming PlayStation 3 console, while ATI’s graphic chipsets are used in Microsoft’s XBox 360 and Nintendo’s forthcoming Wii console.

The deal also makes AMD, by way of ATI, the No. 2 supplier in the mobile graphics market behind Intel.

According to Peddie’s Q1 2006 mobile graphics report, Intel leads with 39.1 percent of mobile video parts, ATI is second with 28.7 percent and nVidia is third with 19.0 percent.

On the desktop, Intel is also the leader thanks to its integrated graphics, with 34.1 percent, while ATI had 26.1 percent and nVidia had 23.3 percent.

David Needle contributed to this story.

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