A deal had been expected among suppliers in Taiwan's technology community last month. Taiwan-based sources close to the two companies said officials were making eyes at each other during Computex, one of Asia's largest IT trade shows.

The deal is expected to have wide-ranging implications for the industry. Suppliers in Taiwan have been forced to consider how it woud affect their businesses.

While AMD has thus far only focused on the processor business, Intel Corp. has been taking advantage of its processor and integrated graphics business. If the acquisition goes through, the deal would give AMD "what Intel already has, plus more—a discrete graphics chip business Intel doesn't have," said market researcher Jon Peddie. Noting aggressive cost procurement reduction programs at Hewlett-Packard, Dell and others, Peddie said, "The best way to reduce the cost for PC vendors is to deal with fewer suppliers."

The acquisition of ATI (Markham, Ont.) also helps AMD control pricing on motherboards carrying its silicon. Intel provides CPU, chips et and networking ICs, in addition to having a leading motherboard division. "Intel drops prices on motherboards, and everyone else has to follow," said a product manager at Gigabyte Computer, who spoke on condition of anonymity.

"ATI shares our passion and complements our strengths: technology leadership and customer centric innovation," AMD Chairman and CEO Hector Ruiz said in a statement.

Added Dave Orton, ATI's president and CEO: "Joining with AMD will enable us to innovate aggressively on the PC platform, and continue to invest significantly in our consumer business to stay in front of our markets."

Originally, the deal was based on conjecture by one analyst at RBC Capital, who issued a note on March 31 saying that a deal was in the works, but offered scant evidence to support it. Aside from causing a spike in ATI's share price, skepticism held sway. At Computex, Taiwanese executives said they had follow-up conversations that led them to believe a deal is imminent.

"AMD has been shopping around for some time for a chip set and, to some extent, a graphics business. So this makes sense," said a senior executive at a Taiwan chip set company familiar with the deal. Other sources at motherboard makers also say something is in the works.

While many industry sources see a handful of reasons why such a partnership could work, there are just as many observers see abundant reasons why it would not.

For one, AMD has never put much emphasis on owning a platform. It often touts the "freedom" system designers have when using AMD, citing its reluctance to team up with other companies to set mandated parts lists in its wireless and media PC efforts. Intel has done so with Centrino and Viiv.

Another concern over the pending acquisition is how well AMD can actually manage ATI's graphics chip business. "If AMD tries to integrate the whole thing too aggressively, they will suffer the same fate as Intel did," said Peddie. "You need to leave ATI alone."

GPU development cycles are typically much faster than those for CPUs—6-12 months versus 18 months to 2-3 years. "Most integrated CPU-graphics products have either failed or been very short-term successes in the PC market with a bit more longevity in embedded," said Dean McCarron, principal analyst at Mercury Research. For proof, he points to Intel's Timna, and the MediaGX from the defunct Cyrix Corp.

In 2000, Intel hoped to position a heavily integrated CPU at low-end, sub-$600 machines, and some industry analysts predicted that the era of the system-on-chip PC was imminent. Then Intel canceled the project in late 2000 after running into technical challenges with memory controllers and graphics integration.

Some in the industry are estimating the price of the deal as high as $5.5 billion, while questioning whether AMD is positioned to make such a big acquisition work. The company is clearly enjoying good times. Its market share stands at just above 20 percent for the first time in four years, it has about $2.6 billion in cash and it's been making steady progress with its Operton line of server chips, most recently with a design win at Dell Computer.

But AMD also needs to husband its cash for fab expansion in Dresden, Germany, and the transition to the 45-nm node.

By: DocMemory
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