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AMD will acquire ATI for $5.6 bln next week!

Chip maker Advanced Micro Devices Inc. is considering a $5.6-billion (U.S.) takeover bid for ATI Technologies Inc., a leading manufacturer of computer graphics chips, sources say.

ATI stock is rising today on rumours that AMD will make a friendly offer of between $21 and $23 as early as next week.

The board of directors at Sunnyvale, California-based AMD have approved a takeover offer, according to an investment banker familiar with the talks. Other sources in the financial industry said AMD executives have been spotted at ATI's Markham, Ont. head office.

ATI shares are changing hands at $16.12 on the Nasdaq exchange, up 39 cents from yesterday's close, with twice the trading volume typically seen in the stock. At these prices, ATI sports a $4.1-billion market capitalization.

There has been considerable industry speculation that AMD may pursue an acquisition of ATI Technologies, although such an outcome is by no means certain, said a report this week for analyst Eric Gomberg at investment bank Thomas Weisel Partners.

In light of AMD's technology road map, and specifically its Torrenza technology, we believe that such a merger would not be so far fetched.

AMD would make an offer at a 20-to-40-per-cent premium to ATI's current share price, Mr. Gomberg estimated. ATI and arch-rival Nvidia Corp. dominate the market for the chips that run computer games. AMD and its major competitor, Intel, both buy ATI products.

Other industry watchers were less convinced an offer was coming, or that such a union made sense for AMD. One analyst described such a deal as a breathtakingly bad idea from a strategic perspective.

AMD has whipped Intel from one end of the school yard to the other over the last three years and done so without a graphics business of its own. Acquiring a graphics capability would be an expensive distraction and would offer AMD almost no advantage, the analyst said.

ATI has maintained closer ties to Intel over the years than AMD, and that relationship would be troubling for ATI to dismantle.

The closeness of the two means ATI gets an early look at some of the standards and technology that Intel, the world's biggest chip maker, is working on. If AMD acquired ATI, expect Intel to send ATI to the back of the bus, the analyst said.

In addition, Intel has left a lot of the lower-margin business of chipsets to ATI as Intel wrestles with capacity constraints. As a result, integrated chipsets account for about 25 per cent of ATI's revenue today, up from just 10 per cent a year ago.

Intel would likely move to repatriate that business if AMD acquired ATI.

Another messy factor to consider is that Intel and ATI have cross-licensed some of their intellectual property, raising the possibility that some of ATI's technology would end up in a competitor's hand after a deal.

Stupidity is no barrier to tech mergers, the analyst said. �This deal would be out of strategy for AMD and out of focus.

Other people watching the chip sector wonder if AMD is being forced into making an acquisition because it fears Intel may use graphics to lock it out of markets in the future.

If AMD has got a whiff of something that Intel is doing far enough out and now realizes it needs graphics IP to compete, then a deal makes sense, a second analyst said.



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