The AMD-ATI Acquisition: Integration and Freedom for Customers, IHVs

Published: July 27, 2006

by Timothy Prickett Morgan

Who says you can't have it both ways? That is, in essence, the grand strategy that has lead processor chip maker AMD spending $5.4 billion to acquire graphics processor and chipset maker ATI Technologies. Not only does AMD want everyone to believe that it can have it both ways--have a captive graphics chip and chipset maker--but that this is, in fact, an inevitable consequence of convergence pressures in the IT industry.

While there is no question that the combination of AMD and ATI transforms the resulting chip company into a powerhouse that is going to be better able to give rival Intel grief, a similar argument could be made that ATI's rival nVidia was a better fit but beyond AMD's budget. In fact, in a deal between AMD and nVidia, you might be able to rightly question who was buying whom. As we go to press in the wake of the AMD-ATI deal, nVidia has a market capitalization of $6.2 billion, and applying the same 1.7 multiple that AMD coughed up for ATI (which had a $3.2 billion market capitalization prior to the rumors of the AMD deal coming down), AMD would have to pay about $12.5 billion for nVidia. Which, of course, it can't do, since it only has a market cap of about $12 billion prior to the ATI acquisition rumors. Incidentally, according to Patrick Moorehead, vice president of advanced marketing at AMD, the company did indeed entertain the idea of merging with nVidia. But that would have been a merger of equals, and AMD's top brass would not have been in charge.

This is not, of course, the only reason that the ATI deal might be a better fit for AMD, even if its stock dropping by 5 percent when the deal was announced on Monday doesn't seem to be a good indicator. Wall Street is not necessarily good at understanding technical issues. Look at the AOL-Time Warner and MCI-WorldCom mergers, just to name two.

As you might imagine, Hector Ruiz, AMD's chairman and chief executive officer, and Dave Orton, ATI's president and chief executive officer, were a little short on the details about how the synergies between a CPU maker and a GPU and chipset maker might play out. With the deal not closing until some time in the fourth quarter, after ATI's shareholders meet to vote on the acquisition, the top executives at the company are not able to put much meat on the roadmap bones they outlined for the combined company for 2007, 2008, and beyond. "Together, we intend to create a processing powerhouse," explained Ruiz, and he was followed up by Orton, who proclaimed that the merged companies would "innovate beyond the existing CPU and GPU boundaries." The companies talked vaguely of creating general purpose, media centric, data centric, and graphic centric processor complexes, and no one on the call with Wall Street analysts really understood much about what that might mean.

When pressed, Dirk Meyer, AMD's president and chief operating officer, was a little more specific. "We see the opportunity to integrate CPU and GPU cores on a single die," he explained. But he made it clear that this would not be the only way that AMD delivered processors or graphics, and that the company would continue to make its interface specifications available to companies like nVidia, ServerWorks, VIA Technologies, and Silicon Integrated Systems, which all make chipsets that support AMD's Athlon or Opteron processors and which are now AMD's competitors thanks to the ATI acquisition.

To prove that AMD is serious, Moorehead says that the company will put an informational firewall around ATI such that it does not get preferential treatment from AMD corporate with regards to specifications and information. AMD knows that it cannot afford to alienate the chipset and graphics card suppliers that have helped make the Athlon and Opteron a viable alternative to Intel's Pentium and Xeon processors. "We know who brought us to the dance," he says. "Where openness is desired and required, we want to provide that," Moorehead explained, saying that a perfect example is the way AMD opened up HyperTransport and even tried to get Intel interested in working together on a coherent version (as opposed to asynchronous, not unintelligible) of the interconnection protocol that is at the heart of its Opteron processors. "Where integration is required, we want to do that, too."

As an example, he said that AMD could, in theory, take a K8 processor core and an ATI graphics processor and put it all on a single piece of silicon. Such device might be aimed at extremely low-powered computers, which have modest computing needs and minimal electricity available. Think of the One Laptop Per Child initiative, or the so-called BRIC countries--Brazil, Russia, India, and China--where the cost of a notebook and the undependability of electricity makes computers less useful than they might be if they were not such power hogs. With ATI having a sizable share of digital television processors, there could come a day when these televisions need more processing power--real, general purpose processing power--and an Opteron core might be an appropriate add-on there. There are obvious variants to this idea for AMD to crack the general server and notebook markets (just by peddling processors, chipsets, and graphics as a unit) and to help foster more sophisticated visualization servers and workstations for high-end supercomputing applications. It is interesting to ponder AMD taking a run at the next-generation of game machines; the current generation of game consoles are dominated by IBM's PowerPC and related Cell processors, the latter of which is a special PowerPC chip with graphics engines built right onto it.

Whatever AMD is going to do, it is not going to alienate nVidia, ServerWorks, SiS, or VIA. "We are not going to put up blockades or massive royalties," said Moorehead. "That would be dumb." Yes, it would, at least in the short term. The trick now is for these companies to differentiate themselves as they provide chipsets, graphics cards, or both (as nVidia does). For starters, they can all say that unlike Intel and AMD, they are not captive electronics suppliers. And they most certainly will be saying that, a lot.

This all leaves two questions: Will Intel try to swoop in and steal ATI? Or will it acquire nVidia?