Nvidia Threatened by AMD ATI Merger

 |  Includes: AMD, ATYT, NVDA
by: David Jackson

Excerpt from our One Page Annotated Wall Street Journal Summary (receive it by email every morning by signing up here):

AMD to Buy ATI, A Grasp for an Edge Over Intel

  • Summary: Advanced Micro Devices (NYSE:AMD) has agreed to buy ATI Technologies for $5.4 billion, or about $20.47 per ATI share, roughly 24% above ATI's closing price on Friday. Of that sum, about $4.2 billion or $16.40 per share will be paid in cash and the rest in stock. Since AMD has only $2.5 billion in cash, it plans to use debt to finance the transaction. AMD's acquisition of ATI, which produces high end graphics chips and chip sets, allows it to better compete with Intel, which has been able to use its broad product range including chip sets and microprocessors to lower overall power usage, guarantee the timing of upgrades, and build graphics capabilities directly into chip sets. AMD's successful integration of ATI faces two challenges: ATI has recently fallen behind Nvidia in high-end graphics chips, and AMD is under pressure itself from aggressive price competition from Intel.
  • Comment on related stocks/ETFs: ATI's stock (ATYT) rose 5.3% on Friday and another 9% in late trading. Investors will focus on two issues. First: Will this acquisition succeed for AMD (AMD? It's upping its debt load and loosening its focus just as it comes under maximum pressure from Intel (NASDAQ:INTC). Second: what are the implications for graphics chip competitor Nvidia (NASDAQ:NVDA)? According to the article, "AMD still needs Nvidia's support in selling both chip sets and graphics chips. AMD is expected to give assurances that it will continue to give PC makers a choice among component suppliers and to set up procedures to handle technical information in ways that treat ATI and Nvidia on evenhandedly." But if the rationale for this acquisition is that the market wants integrated processors and chipsets and then multi-core chips containing processor, graphics and other functionality, Nvidia will be left in a weak position.