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AMD to acquire ATI for US$5.4 billion

In a deal that will reshape the semiconductor industry, Advanced Micro Devices Inc (AMD) agreed to buy ATI Technologies Inc on Sunday night for US$5.4 billion in cash and stock, people involved in the transaction said.

The deal, which was expected to be announced yesterday, comes as the semiconductor industry is becoming the focus of intense investor interest. Later this week, Philips Electronics plans to field final bids worth more than US$10 billion apiece for its semiconductor division from three consortiums of private equity investors, according to people involved in that auction. Philips had been considering an initial public offering for the unit.

AMD's deal for ATI, worth US$4.2 billion in cash and US$1.2 billion in stock, will expand AMD's business into graphic chipsets used in high-end PC's for playing video games and in workstations used in design work or to create video games and movie animation as well as chipsets for cellphones and handheld devices.

A chipset connects a computer system's processor to its memory and other parts, facilitating the flow of data among components.

"The deal puts AMD on more equal footing with Intel," said Samir Bhavnani, director of research at Current Analysis, a market research firm in San Diego, California. "It completes the puzzle for AMD."

He said the deal was important because it takes AMD beyond PCs and gives it greater strength for the cellphone and handheld markets.

The deal is not without challenges. While both companies have reported strong earnings growth over the past year, overall growth of PC sales is slowing, particularly in the high end of the market where the graphics chips are important components.

The slowdown also means the price competition with Intel for the core processors at the low end of the market has increased. Lower prices mean that AMD makes less money per processor.

The ability to sell graphics chipsets along with a processor could help improve AMD's overall gross profit margins, which fell in the latest quarter to 56.8 percent from 58.5 percent in the prior quarter.

ATI is a major player in a number of promising technologies that will grow as the electronics industry shifts away from the dominance of PCs to new forms of television, enhanced set-top boxes as well as handheld videoplayers. For instance, ATI makes chips for integrated digital televisions, which get digital broadcast over the airwaves. It also makes image processors that are used to display video on cellphones or mobile handheld game machines.

In its third quarter, ended May 31, ATI reported that revenue from the consumer side of its business grew 120 percent year-over-year due to strength in the handhelds market. Shipments of chips for the digital TV market more than doubled. By contrast, its revenue from chips used in PC's increased only 8.5 percent from the year earlier quarter.

Philips Semiconductors was ranked as the world's eighth-largest semiconductor maker last year by iSuppli, a market research firm. AMD was ranked slightly behind it. ATI was ranked as No. 25.
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