| Tech Stock News and Analysis |
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| Monday, July 24, 2006 |
Advanced Micro Devices Inc. said on Monday it would buy Canadian graphics chipmaker ATI Technologies Inc. for $5.4 billion, in what analysts called an aggressive but expensive move to compete with Intel Corp.
The deal will give AMD, the No. 2 supplier of computer processors, better high-end graphics products for mobile computing, gaming and media markets putting pressure on its larger rival Intel.
Under the terms of the pact, AMD will pay $4.2 billion in cash and 57 million shares of AMD common stock. That is about $20.47 for each ATI share, a 24 percent premium over ATI's closing price on Nasdaq on Friday. AMD will take on $2.5 billion in new debt to complete the acquisition.
While there are potential savings from the deal, it also compounds the risk facing AMD, which is embroiled in a bitter price war with Intel, analysts said.
"AMD must take on another significant amount of debt, which could be compounded with even more debt as the firm has laid out an aggressive capacity expansion plan for the next several years," Stifel, Nicolaus & Co. analyst Cody Acree wrote in a note to clients. AMD plans to spend $5 billion to boost capacity.
AMD expects to finance the cash portion of the transaction with a combination of cash and new debt. It has obtained a $2.5 billion term loan commitment from Morgan Stanley Senior Funding to help pay for the pact.
Ratings agencies Standard & Poor's and Moody's Investors Service said on Monday they may cut AMD's credit ratings as a result of the acquisition.
MAKES LITTLE SENSE
Since rumors of a deal first emerged in May, many industry analysts have voiced skepticism, saying it made little financial or strategic sense for AMD to buy ATI outright.
"There's probably the sound of champagne corks being let fly at Intel headquarters right now," said Brian Piccioni, an analyst at BMO Capital Markets. "Basically, AMD has bet the company on this transaction."
AMD shares slipped 4.8 percent to $17.39 on the New York Stock Exchange in late trading, ATI jumped 19 percent to $19.67 and Intel shares rose 1.9 percent to $17.48 on the Nasdaq.
The Shares in ATI rival Nvidia Corp. rose 10 percent to $19.55 as analysts said it may gain more business from Intel after ATI is absorbed into AMD, or even be an acquisition target for Intel.
Active trading in Nvidia's stock options indicate there is "talk that the merger is a positive for the company because it now puts Nvidia in play," said Frederic Ruffy, an analyst at Optionetics, a California-based options education firm.
But Nvidia's vice president of investor relations, Michael Hara, told Reuters the firm saw no need to pursue a merger. Intel declined comment.
ATI is also a big supplier of chipsets -- the cluster of secondary chips and interfaces that surround a computer's processor -- for both AMD and Intel.
An AMD executive told Reuters he expected Intel to "move away from ATI" as a supplier as it is integrated into AMD.
He said there is no plan to reduce research and development spending as a result of the merger, nor any major layoffs.
The acquisition is expected to slightly add to earnings in 2007 and AMD said it will be "meaningfully accretive" in 2008, before the inclusion of acquisition-related charges. It sees a reduction of operating expenses by about $75 million for the combined company by the end of 2007.
But Bank of America analyst Sumit Dhanda said that, while the addition of ATI's revenue will boost AMD's 2007 sales by about $2.9 billion, the acquisition will likely shrink profit margins for AMD over the long term.
ATI Chief Technology Officer Adrian Hartog said he saw short-term opportunities starting in 2007 to grow market share in the "commercial and mobile platforms within the PC space."
ATI said it has agreed to a termination fee of $162 million. The deal is subject to the approval of ATI shareholders and regulators in the United States and Canada. |
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