S3 Inc agreed to acquire Diamond Multimedia Systems Inc yesterday, in the latest in a series of consolidations between graphics chip makers and board manufacturers. But S3 also has its eye on Diamond’s more recent moves into the high growth internet appliance and home networking markets.
S3 will acquire Diamond through a stock swap under which Diamond shareholders will receive 0.52m shares of S3 common stock for each share of Diamond stock, in a deal worth around $175m. S3 has plenty of funds available, with $130m cash in hand and 252m shares of United Microelectronics Corp, valued at around $600m, due to arrive shortly (CI No 3,684). It said the deal was part of its plan to return S3 to profitability and diversify into other areas, rather than focus exclusively on the PC market.
Board and chip vendors in the competitive PC graphics market have been consolidating over the last few years. Last year, Evans & Sutherland Inc acquired AccelGraphics Inc (CI No 3,395), 3Dlabs Inc acquired Dynamic Pictures Inc (CI No 3,452) and 3Dfx Inc acquired STB Systems Inc for $141m (CI No 3,559). S3’s core business will benefit not only from Diamond’s board-level business, but also from its strong retail channels.
In fact S3 has recently seen a recovery in its graphics product sales, with the launch of the Savage4 and Savage MX chips, and lucrative OEM deals from Compaq Computer Corp, Dell Computer Corp, IBM Corp, NEC/Packard Bell and Micron Electronics Inc. Diamond started using S3 chips in its 2D/3D graphics boards last year (CI No 3,446). Diamond also has an exclusive agreement with IBM Corp to supply graphics accelerators based on Big Blue technology to the Windows NT workstation market. But at the end of last year, Diamond cut 180 staff, around a fifth of its workforce, and eliminated low-margin product lines, in a bid to regain profitability.
Diamond has, however, been gaining the most attention recently from new products, such as its Rio MP3 Player, a consumer device for downloading compressed music files from the internet, and from HomeFree, a new line of home networking products. Santa Clara, California-based S3, and Diamond, a near neighbor in San Jose, will also continue to invest in Diamond’s DSL digital subscriber line and cable modem product development projects, the two said.
Others have the same idea. ATI Technologies Inc, which owns around half of the graphics and multimedia board business, recently licensed the MIPS RISC chip from MIPS Technologies Inc in a move to diversify into set-top box and consumer-focused computing devices, though still with a graphics focus.
