AMD to Buy ATI

By Jessica Davis -- Electronic News, 7/24/2006 8:00:00 AM

In a bold move to gain more market share from its Goliath rival Intel, Advanced Micro Devices today announced that it will acquire one of the big two graphics chipmakers, ATI, in a transaction valued at approximately $5.4 billion.

AMD shares were down nearly 5 percent or 90 cents on the news in mid-day trading while ATI shares spiked up 18 percent or $3 per share.

 “This is a strategy that has been in making for a number of years that culminated today with acquisition of ATI,” said AMD CEO Hector Ruiz in a press conference in New York this morning, announcing the deal. “There was always the knowledge that visual communications would play a much bigger role going forward.”

The chief goal of the merger is market share increases against Intel, executives at the news conference said.  President and COO Dirk Meyer said that each incremental point of market share means $300 million in revenues for AMD.

Intel already offered its own chipsets to customers, but also offered chipsets from Nvidia and ATI, the big two graphics co-processor makers. ATI CEO Dave Orton said that in the last quarter 30 to 40 percent of its core logic revenues came from AMD platforms.

Ruiz dismissed questions about whether this acquisition positions AMD to mirror Intel’s platform strategy.  Rather, Ruiz said, AMD would continue with its anti-platform strategy, enabling customers to choose best-of-breed chip sets. He said an example of that came in the form of the company’s Torrenza strategy, announced earlier this year, which opened up APIs to developers, enabling the customization of chips for particular customers.

The deal also will expand AMD’s manufacturing options even further since ATI has relationships with the top two foundries, TSMC and UMC.  AMD recently announced plans to expand its internal manufacturing with new 300mm fabs in Dresden, Germany and Malta, N.Y.   AMD also has an existing relationship with Chartered, the number three foundry.

“We have a broad array of options for us to optimize our manufacturing strategy in the future,” Ruiz said.

AMD said that in 2008 and beyond it aims to create silicon-specific platforms that integrate microprocessors and graphics processors to address the growing need for general-purpose, media-centric, data-centric and graphics-centric performance. The company will also continue to develop “best of breed” discrete products.

The combined company would have achieved approximately $7.3 billion1 in total consolidated sales during the last four quarters with a workforce of approximately 15,000 employees. Headquartered in Sunnyvale, California, the company will maintain sales, design and manufacturing centers worldwide and major business centers in Silicon Valley, Austin, Texas and Markham, Ontario - all valued centers of innovation for the combined company. AMD’s current executive team will be complemented by the addition of ATI President and CEO Dave Orton. Orton will serve as an executive vice president of the ATI business division, reporting to the AMD Office of the CEO, comprised of Chairman and CEO Hector Ruiz and President and Chief Operating Officer Dirk Meyer. In addition, under the terms of the acquisition agreement, two ATI directors will join AMD’s board of directors upon closing of the transaction.

Ruiz said that while there was some overlap between the company and synergies could be realized, he anticipated no layoffs as a result of the acquisition.

Under the terms of the transaction, AMD will acquire all of the outstanding common shares of ATI for a combination of $4.2 billion in cash and 57 million shares of AMD common stock, based on the number of shares of ATI common stock outstanding on July 21, 2006. All outstanding options and restricted stock units of ATI will be assumed. Based upon the closing price of AMD common stock on July 21, 2006 of $18.26 a share, the consideration for each outstanding share of ATI common stock would be $20.47, comprised of $16.40 of cash and 0.2229 shares of AMD common stock.

AMD anticipates it will finance the cash portion of the transaction with a combination of cash and new debt. AMD has obtained a $2.5 billion term loan commitment from Morgan Stanley Senior Funding, Inc. which, together with combined existing cash, cash equivalents, and short term investments balances of approximately $3.0 billion, provides full funding for the transaction.

ATI has received an opinion from its financial advisors that the transaction from a financial point of view is fair to its shareholders. The transaction was unanimously approved by the board of directors of each company. The transaction is subject to ATI shareholder approval, Canadian court supervision of a Plan of Arrangement, and other regulatory approvals including merger notification filings in the United States, Canada and other jurisdictions, as well as customary closing conditions. In the event that the transaction does not close, ATI has agreed to pay AMD a termination fee of $162.0 million under circumstances specified in the acquisition agreement. The transaction is expected to be completed in the fourth quarter of 2006.

AMD expects that the transaction will be slightly accretive to earnings in 2007, and meaningfully accretive in 2008, before the inclusion of ATI acquisition–related charges, based upon AMD’s plans to deliver more integrated and advanced platform solutions and thereby improve its position in commercial clients, mobile computing, gaming, media and emerging markets. AMD anticipates that it will reduce operating expenses by approximately $75 million for the combined company by the end of 2007.