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Wednesday, May 31, 2006
Forbes: AMD-ATI Merger Looks Likely!


AMD may be looking to buy graphics company ATI Technologies, a move that would benefit the overall graphics industry, according to RBC Capital Markets.

"The synergies of this seem consistent with the recent announcements by AMD to significantly increase capacity over the next few-years," wrote analyst Apjit Walia in a note to investors Wednesday. "We believe ATI is a rare-buy in the semiconductor space right now given the near-term tie-up dynamics."

Walia based his prediction on recent checks in the PC food chain. RBC has an "outperform" rating and $23 price target on ATI, and no rating on AMD. The firm expects ATI to report fiscal 2007 earnings per share of $1.06.

It has long been discussed that the graphics-companies are likely to be bought by one of the microprocessor companies, according to Walia. However, for AMD-rival Intel, a partnership with a graphics company may not be the best idea.

"This tie-up might make sense for AMD at this juncture but we don't think Intel should pursue tying-up with graphics companies and should instead look at the communications-space," said the analyst.

Walia maintained a "sector perform" rating and $21 price target on Intel, expecting more announcements of Dell-AMD partnerships this year, to Intel's detriment.

"The competitive dynamics of the microprocessor-market seem to be changing permanently, he said. "We believe Intel is still not 'reading-the-writing-on-the-wall' and continues to over-focus on PCs."

Intel has introduced drastic price-cuts for its Celeron, Pentium-4, Pentium-D and Conroe processors, which could make the price-war "quite ugly," in Walia's opinion. Intel does seem to have gained some share-back from AMD with the price cuts, but the impact on margins is negative, the analyst said.

In addition, the overall PC market continues to slow and Intel's June quarter is looking "progressively worse" with revenues down close to 10% and the September quarter tracking below seasonality, according to Walia's checks.

"We turned neutral on Intel couple-of-weeks ago given our view of the risk-reward being balanced given the bad-news out there, but we remain negative on the semi-space," said the analyst. "However, this AMD-ATI tie-up would obviously be a clear-positive for the graphics space."


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