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Tuesday, August 01, 2006
AMD Gambles on ATI Route to New Markets

AMD hopes its acquisition of ATI will help drive growth in new markets. But AMD faces significant risks to its execution. Its graphics rival nVidia is likely to prevail through 2008.

On 24 July 2006, AMD announced that it has agreed to acquire ATI for $5.4 billion in cash and shares. The deal is expected to close during 4Q06.

AMD is betting that having graphics and chipset capabilities in-house will enable it to take market share from Intel. On completion of this deal, AMD will be able to offer AMD-branded systems that compete directly with Intel?s platform chipsets and packages and, in the long term, enable it to develop highly integrated graphics and processor silicon. AMD has promised tangible results from this deal during 2007, which we anticipate will include a system-in-package design for notebooks. Such integration will deliver longer battery life than is offered by AMD?s current solution.

AMD has long extolled the virtues of its not being a chipset provider. This acquisition will inevitably alienate partners nVidia, SiS, Via and Broadcom. Intel could take advantage of this situation and put pressure on AMD by helping nVidia capture a larger share of graphics revenue associated with Intel-based systems.

ATI's business within the highly competitive markets for cell phones and digital TV devices will also pose a challenge for AMD. However, AMD has identified an opportunity to add value to ATI's offerings by bringing x86 capabilities to this market. AMD's decision to acquire ATI was motivated in part by AMD's belief that half of the world's population should have Internet connectivity by 2015, which has led to AMD's 50x15 initiative.

Overall, acquiring ATI is a risky bet for AMD. Its market share gains must be large enough to make up for the high price of the acquisition, the attrition of ATI?s Intel-related business, declining margins in a consolidating PC industry, and the risk that the consumer electronics business it has acquired with ATI may languish in the shadow of AMD's focus on microprocessors

Gartner analysts recommend PC and server buyers to take no action, as the acquisition will not have any immediate effect on product portfolios from leading PC suppliers.

PC vendors should expect Intel to provide more support for nVidia technologies, such as the double graphic card SLI technology.

Partners in consumer electronics should monitor ATI's product road maps for signs of changes in its long-term commitment.

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