Advanced Micro Devices on Monday took its biggest gamble in its attempt to keep pace with its larger rival Intel, buying graphics chipmaker ATI Technologies for $5.4bn in the second largest takeover in the semiconductor industry’s history.

AMD has confined itself to building the central processing units (CPUs) of computers until now. The acquisition of ATI allows it to offer the accompanying logic and graphics chipsets in an own-brand “platform” approach that will match that of Intel.

But it is buying ATI in the middle of a price war with Intel, at a time when it is committed to spending billions of dollars on expanding its manufacturing capacity and when its shares fell to a 52-week low of $17.41 on Monday.

AMD said it would pay $4.2bn in cash and offer 57m AMD shares, which closed at $18.26 on Friday. This would mean it paying $20.47 for each ATI share, a 24 per cent premium to its closing price on Friday.

AMD has obtained a $2.5bn loan commitment from Morgan Stanley to help finance the cash portion and has around $3bn in cash and short-term investments available.

The deal, which is expected to close in the fourth quarter is the biggest since Texas Instruments acquired Burr-Brown for around $6bn in 2000, according to the Wall Street Access research firm. It will create a company of 15,000 employees, with ATI’s top management team being integrated into that of AMD and its main Toronto facilities being maintained.

Hector Ruiz, AMD chief executive, told an analyst conference call he did not expect significant redundancies, although the elimination of overlaps would mean savings of $75m in 2007 and $125m in 2008.

Bob Rivet, chief financial officer, said he believed the deal would be meaningfully accretive to earnings in 2008, before charges associated with the acquisition.

The deal will mean major shifts in the industry. To date, AMD has worked with a range of chipset manufacturers to complement its microprocessors and relied on its Silicon Valley neighbour Nvidia and ATI to offer PC manufacturers best-of-breed graphics chipsets.

AMD insisted on Monday that a relationship with Nvidia could still be maintained in some areas of its business. But the close competition between Nvidia and ATI in the graphics field, mirroring that of Intel and AMD in microprocessors, has taken on a new dynamic.

Meanwhile, Intel has been a significant customer of ATI, using its chipsets in situations such as shortages of its own chips. It is highly unlikely to do so with ATI under the wing of its biggest rival.

Dave Orton, ATI chief executive, said 30 to 40 per cent of revenues for its logic chips came from Intel in its last quarter and Mr Rivet said $80 to $100m a quarter in ATI revenues were Intel related.

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