AMD close to $5.5bn deal for ATI

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Advanced Micro Devices is near to buying the Canadian graphics chipmaker ATI Technologies for around $5.5bn, according to people close to the deal.

Any agreement would represent a major gamble by AMD to put itself on a level footing with its bigger rival Intel, which makes its own graphics chips.

The asking price suggests AMD would have to offer a substantial number of its own shares as part of the deal or take on debt. It had cash balances of $2.5bn at the end of June, but is spending billions on developing new chip plants, including $2.5bn in capital expenditure next year.

An AMD spokeswoman said on Friday it did not comment on rumour or speculation. Its shares closed nearly 16 per cent lower at $18.26 after poor second-quarter results and rumours of the deal. ATI’s finished 6 per cent higher in Toronto at $18.77.

The takeover, which could be announced in the next few days, could also be a blow to AMD’s Silicon Valley neighbour Nvidia, whose shares fell 7.5 per cent on Friday. AMD has combined its microprocessors with both Nvidia and ATI graphics chipsets, but may side in future with ATI’s products.

At the same time, ATI has been providing third-party chipsets to Intel and could lose that business if it is bought by AMD.

Analysts have long speculated that the bigger microprocessor companies could buy the graphics chipmakers, but the logic has never been compelling.

Intel is already the biggest maker of graphics chips with the integrated chipsets it sells for computer motherboards. It is also in a cost-cutting mode and has just sold its division making chips for mobile phones.

AMD has always reasoned it can offer best of breed graphics by choosing chipsets from either ATI or Nvidia. It has also sought to focus on microprocessors after spinning off its Spansion memory chip business last December.

But it may feel it has to match Intel’s graphic abilities to compete with it in future in new markets such as the “digital home”.

In its last quarter, 23 per cent of ATI’s total sales and 70 per cent of its operating income came from non-PC businesses, according to Merrill Lynch.

It reported revenues of $653m for the quarter and earnings per share of 12 cents.

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