Did Intel's New Chips Fuel AMD-ATI Merger?

AMD believes adding ATI is necessary to keep its momentum of the past two years rolling, a period in which it grew its share of the x86 processor market from 15% to 22%, according to Mercury Research. Hector Ruiz, AMD's chairman and chief executive, believes his company should make the jump to about a third of the market within the next two years, and ATI is expected to help fuel that next phase of growth.

Bob Rivet, AMD's chief financial officer, points out that each percentage of market share that AMD can gain translates into $300 million in additional annual revenue. Another 10% gain in market share would add about $3 billion in revenue to a company that currently has an annual revenue run rate just short of $5 billion.

The $5.4 billion that AMD is paying for ATI is a lot of money to acquire any company or any technology no matter now valuable it may be to the long-term strategy. There's always a chance that any acquisition will fail, and the larger and more distant that technology is from the company's core business, the greater the risk of failure.

AMD sees a lot of synergy between its microprocessor business and ATI's graphics and chipset business. In particular, AMD believes the in-house graphics capabilities will help it grow its commercial desktop and laptop business, two areas that lag behind its strength in servers and consumer desktop PCs.

In fact, general-purpose microprocessors and graphics processors do go hand in hand in a growing number of media-intensive applications associated with computers and digital home equipment. Early this decade Intel thought there were a lot of synergies in trying to expand its core microprocessor business into processors for cell phones. After investing $5 billion or more in an effort to build a new business in the cell phone market, however, Intel admitted failure last month, pulling the plug and selling that business to Marvell for $600 million.

"Together we intend to create a processing powerhouse," Ruiz said during a teleconference Monday to announce the ATI acquisition. "We are confident the companies will integrate well together. We believe that as technology advances, integration is not only inevitable, but also advantageous."

AMD may have also seen that after two years of relatively "easy" market share gains built in part on top of Intel blunders, the going would be a lot tougher in the years ahead. Intel's new portfolio of processors based on its new Core architecture is providing a much steeper challenge to AMD than the shopworn portfolio Intel has put on the market the past couple of years. Some early benchmarks and performance tests have been very favorable to Intel's new lineup.

Despite AMD's claims to the contrary, the acquisition of ATI also seems to be a departure from its previous position as a pure-play microprocessor player that steered clear of the "platform" efforts characterized by Intel of the past few years. Intel has a multibillion-dollar chipset business, and AMD has indicated in the past that it believed equipment manufacturers and third-party chip vendors felt limited by the Intel platform approach.

To at least some degree, AMD is now a chipset and platform vendor as well. AMD pledges to keep its interfaces open and allow customers to choose whether to use its pending ATI graphics chipset or go with a third-party vendor like Nvidia. How truly "open" that relationship remains will have to be proven out in the market over the next year.

Ruiz says the ATI acquisition has been years in the making, but one has to wonder how big an effect Intel's recent processor overhaul had on forcing AMD to make this huge financial investment, which has created a new game plan for the future.