A prospective deal between the two was first mooted in May, but rumors recently began to intensify of a potential deal, despite the fact that AMD is already committed to spending billions of dollars developing new chip plants. AMD has already said it will spend $2.5bn on capital expenditure in 2007.
Under the terms of the deal, AMD will acquire all of the outstanding common shares of ATI for $4.2bn in cash and 57 million shares of AMD common stock (80% in cash, the remainder in stock). AMD had existing cash, cash equivalents, and short-term investment balances of $3bn at the end of June, and is having to finance the cash portion of the transaction with a combination of cash and new debt. It has obtained a $2.5bn term loan commitment from Morgan Stanley Senior Funding.
AMD said it will pay $20.47 for each ATI share. That marks a 24% premium over ATI’s closing stock price of $16.56 on Nasdaq on Friday July 21, 2006.
ATI, which is headquartered in Markham, Ontario, said it has agreed to a termination fee of $162m. The deal is subject to the approval of ATI shareholders and regulators in the US and Canada, and is expected to close in the fourth quarter of this year.
With this transaction, we will move from being neighbors on the motherboard to being members of the same family, said AMD CEO, Hector Ruiz. He went to say how the deal would allow AMD to expand its product mix and market share by tapping into more consumer electronic products, and thereby broadening AMD’s revenue stream.
ATI is perhaps best known for supplying graphic chipsets used in high spec PCs, either for playing video games or workstations used in design work or creating movie animations. ATI also has chipsets for mobile phones and handheld devices.
In May ATI paid $44.4m for mobile graphics chip developer Bitboys Oy, a move that gave it a swift reward in the form of a long-term strategic relationship with Nokia Corp. Bitboys shared the same Espoo, Finland district for its headquarters as Nokia, and the two companies had said they would work together to drive multimedia experiences such as music playback, 3D gaming, mobile TV, and video for Nokia mobile device users.
Besides this, ATI is also a player in emerging technologies such as enhanced set-top boxes and handheld media players. ATI recorded a 120% rise in its third-quarter revenue from the consumer side of its business.
Yet there is no disguising the fact that the deal is a departure from AMD’s normal policy of using best-of-breed chipsets from third parties for its peripheral chip components. AMD has been seeking to concentrate on its core CPU business, after it spun off its flash memory developer, Spansion Inc, last year. Many view the deal as putting AMD on a more equal footing with its larger rival Intel Corp, as it gives AMD access to markets other than the PC, such as mobile phones and handheld devices.
At the moment, ATI has been providing third-party chipsets to Intel and there were some fears that it could lose that business now that it has been purchased by AMD. However, Ruiz dismissed these fears. We have no intension of blocking ATI sales to anyone, he said during the conference call.
Ruiz also pointed to the way he envisages ATI technologies will be used in future, with the possible integration of CPUs and graphic processors, GPUs, on a single die. He compared it to the old days in the chip business, when the floating point was located on a separate chip, until it was merged onto a single CPU chip.
He also said that while the PC still has a central role in the home, the acquisition would allow AMD to build application specific chipsets. Starting in 2008, the combined company will provide specific platforms for a given application set, such as data-centric, video processing, or media-processing applications, he said.
Meanwhile, Sunnyvale, California-based AMD said the transaction will be slightly accretive to earnings in 2007, and meaningfully accretive in 2008, before the inclusion of ATI acquisition-related charges.
AMD anticipates that it will reduce operating expenses by approximately $75m for the combined company by the end of 2007, said the company. When asked whether this would involve job losses, Ruiz said the acquisition was about creating value, not destroying value, although there are some cross-over areas. But you should not expect layoffs in any excessive numbers.
The combined company would have achieved approximately $7.3bn in total consolidated sales during the last four quarters with a workforce of approximately 15,000 employees. It will still be headquartered in Sunnyvale, California, but will maintain sales, design, and manufacturing centers worldwide and major business centers in California, Texas, and Ontario.
ATI’s President and CEO Dave Orton, will serve as an executive vice president of the ATI business division, reporting to the AMD CEO. In addition, under the terms of the acquisition agreement, two ATI directors will join AMD’s board of directors.
Shares in AMD fell 4.98% to $17.35 on the New York Stock Exchange in early trading following the news. Meanwhile, shares in ATI rose 17.09% to $19.39 on Nasdaq, while shares in Nvidia Corp rose 5.63% to $18.77.
