Failure by design

AMD’s recent purchase of ATI for $5.4 billion, which is scheduled to be completed in early 2008, will have a huge impact on an industry dominated by a few players. Intel is by far the largest supplier of computer graphics, due integrated graphics included in OEM laptops and desktops as part of their popular chipsets. The discrete graphics portion of the market is roughly held in equal portions by ATI and Nvidia. This balance has historically oscillated around the 50% market which each company taking the lead momentarily in 6 month product cycles.

Despite not understanding shareholder resentment to AMD’s purchase when it initially occurred, it seems that AMD will have to execute on all cylinders if it expects this merger to go as planned. AMD the majority of the purchase and will also issue shares to finance the purchase. This will dilute the stock and increase their debt by the $2.5 billion provided by Morgan Stanley. ATI will not initially be accretive to AMD’s earnings and is more of a long term investment toward AMD’s dream of a Fusion processor. Investors are worried that should sales slow down, AMD’s purchase will place the company in jeopardy. ATI will allow AMD to begin bundling platforms (chipsets, graphics and processors) to OEMs. This should give AMD pricing power and help manufacturers streamline the supply chain. AMD will also be able to optimize processor and graphics development to compliment one another.

AMD executives have come out saying that ATI will remain a separate entity and will continue to develop discrete graphics and still run under the ATI brand. This is good because ATI sells roughly $200 million in chipsets for Intel computers. This business will likely be reduced in the future as Intel broadens its relationship with Nvidia, but is minimal compared to the $7+ billion in sales that the combined companies generate. However changing ATI’s name will likely cause a dramatic change in market share due to the exodus of Intel customers that will be pressured into an Intel or Nvidia solution. It would be quite ridiculous to have say a laptop with say a Pentium M processor and then AMD graphics and chipset.

The merger aims to help Nvidia the most, whose shares have been on a tear recently, at the expense of AMD. AMD’s stock decline looks to be quite overdone, given that it is 50% off its highs from earlier in the year. AMD’s last quarterly report shows higher marketshare, but it is likely that it will decline a bit until the introduction of Barcelona shortly. Nvidia will likely pick up ATI’s business from Intel for the performance segment of their business. Nvidia is also about to release its latest generation of DirectX 10 videocards 3-4 monthes earlier than ATI. This design lead is likely to accelerate given ATI’s R&D will likely slow a bit given integration problems with AMD. These new DirectX 10 videocards are monsters with massive processing power and 200W of heat dissipation. These are obviously not for the general consumer, and I see a slowdown in the graphics market much like computers market in general has faced the last few years. With current hardware being so far ahead of software, there is just very little need for the average customer to upgrade from a 2 year old computer to a quadcore, with 2 GB of ram and a DX10 videocard.

Thiago Avila

Recently

You can follow any responses to this entry through the RSS 2.0 feed.
You can leave a response, or trackback from your own site.