AMD set to announce deal to buy ATI

AMD chairman and CEO Hector Ruiz and chief financial officer Bob Rivet will be making the announcement.

Rumours of a deal to buy ATI sent the Canadian company's shares up 5.57 per cent, or 99 cents, Friday to $18.77 on the Toronto Stock Exchange. The firm has a market value of about $4.76 billion (Canadian).

AMD shares fell $3.39 (U.S.), or 15.66 per cent Friday, to close at $18.26. AMD's market value is about $8.84 billion.

Reports have placed the price tag of the potential acquisition at about $5.5 billion (U.S.).

If that number is accurate, it is not a great premium to pay given the strategic rationale, said Jon Peddie, the head of California-based Jon Peddie Research.

"If it should happen, I think it's going to be astounding," he said from his home in California last night.

"If it were to happen, this expands AMD's product line so it has a broader line than Intel. It would challenge Intel on all fronts," he said, adding it would upset a lot of plans that various companies have in the works right now.

AMD is the No. 2 supplier of computer processors, and an acquisition of ATI would help it gain market share to battle its larger competitor, Intel Corp.

The deal would give AMD one of two major graphics chip makers, the other being Nvidia Corp., ATI's main rival. ATI also supplies chipsets — the cluster of secondary chips and interfaces that surround a computer's processor — for AMD and Intel products.

Since rumors of a deal first emerged in May, many industry analysts have voiced skepticism, saying it made little financial or strategic sense for AMD to buy ATI outright.

One concern is that the price would be too high for AMD, which already plans to spend $5 billion on capacity in the next few years, even as it fights a bruising price war with Intel.

"It would be a very dilutive acquisition and they don't want to spend their cash because they are going to need that for capital expenditures going forward," said one analyst at a U.S. research firm, who declined to be identified.

Graphics chips are also less profitable than PC processors. Gross margins in the business are about 45 per cent, compared to 55 per cent for main processors.

A tie-up with ATI could raise concerns that AMD would shun Nvidia, and potentially clash with a new AMD initiative called "Torrenza" that will open up its technology so other chipmakers can make their products work better with it.

Some other analysts were more skeptical about the transaction's benefits, with one going so far as to call it a "catastrophe."

ATI declined comment on Friday.

The company has been playing catch-up with Nvidia in PC graphics chips after missing an upgrade cycle last year for the most profitable semiconductors.

Its shares jumped 8 per cent at the end of May after an RBC Capital Markets analyst first reported rumours of a takeover by AMD.

With files from Reuters