It has now been over a week since AMD dropped the bombshell that it would be seeking to acquire ATI in a massive $5.4 billion dollar deal to be closed sometime in Q4 of this year.  Regardless of each company's current position in the market, the AMD/ATI merger has the potential to completely re-write the face of competition and a number of markets we cover on a regular basis.  It's a tremendous gamble on AMD's part, especially considering that much of the deal is in borrowed cash.  Whether this deal ends up being the smartest move AMD ever made or the beginning of the end has yet to be seen, and honestly at this point it's far too early to predict what will come out of it should the acquisition go through. 

While predicting isn't our forte to begin with, what we can do is present you all sides of the story.  We'll take you through the perspectives of AMD and ATI as well as NVIDIA and Intel, and conclude with a bit of our own analysis on the entire situation.  We'll start off with a bit of background information on the acquisition:

• AMD plans on acquiring ATI for a total of $5.4 billion dollars in a mixture of cash and stock.  AMD will use $4.2 billion in cash ($1.7 billion currently on hand, and another $2.5 billion borrowed) and 57 million of its shares to pay for the deal.
• The deal will close in the next 100 - 120 days, finalizing it near the end of 2006.
• AMD isn't disclosing under what conditions it would walk away from the deal. 
• According to AMD's Hector Ruiz, AMD is partnering with ATI to develop "integrated silicon where it makes sense".
• AMD has no intention of blocking or prohibiting the sale of ATI products to anyone, but neither AMD nor ATI is counting on things like ATI Intel chipset sales continuing going forward. 
• Current ATI roadmaps over the next 6 months will remain unchanged.
• ATI's manufacturing arrangement (mainly ATI being a fabless manufacturer) will not change for the next 1 - 2 years.  The current production models will remain as-is. 
• AMD doesn't believe that NVIDIA will alter its relationship with AMD; NVIDIA believes the same. 
• Intel has not revoked ATI's bus license and has not made any public changes to its cross-licensing agreements currently in place with AMD and ATI. 

With the backdrop set, let's kick things off by looking at the merger from AMD's perspective. 

AMD’s Position

Given that AMD is the one ponying up $5.4 billion dollars for the acquisition of ATI, there had better be some incredibly good reasons motivating the investment, especially considering that AMD isn't sitting on a ton of cash at the moment.  AMD is obviously extremely bullish on the move, but still vague on most details as to what it plans on doing with ATI assuming the deal goes through.  The majority of AMD's statements publicly have been reassuring the market that its intention isn't to become another Intel, that it will continue to value its partners (even those that compete with ATI)  and still treat them better than Intel would. 

Completing the Platform & Growing x86 Market Share

While AMD has always publicly stated that it prefers to work with its partners, rather than against them like Intel does, this move is all about becoming more like Intel.  From the platform standpoint, AMD would essentially be expanding its staff to include more engineers, team leaders and product managers that could develop chipsets with and without integrated graphics for AMD processors.  Each AMD CPU sold helps sell a great deal of non-AMD silicon (e.g. NVIDIA GPU, NVIDIA North Bridge, NVIDIA South Bridge), and by acquiring ATI AMD would be able to offer a complete platform that could keep all of those sales in-house.  From a customer standpoint, it’s a lot easier to sell a complete package to a customer than it is to sell an individual component.  Intel proved the strength of the platform with Centrino and AMD is merely following in the giant’s footsteps. 

Going along with completing the platform, being able to provide a complete AMD solution of CPU, motherboard and chipset with integrated graphics could in theory increase AMD’s desktop and mobile market share.  According to AMD, each percentage point of x86 market share is worth about $300M in revenues.  At current profit margins of around 60%, if the acquisition can help increase AMD’s market share by enough percentage points it’s a no-brainer.  AMD is convinced that with a complete platform, it could take even more market share away from Intel particularly in the commerical desktop and consumer/commerical mobile markets. 

Step 2 in Becoming Intel: Find Something to do with Older Fabs

Slowly but surely, AMD has been following in Intel’s footsteps, aiming to improve wherever possible.  We saw the first hints of this trend with the grand opening of Fab 36 in Dresden, and the more recent commitment to build a fab in New York.  AMD wants to get its manufacturing business in shape, which is necessary in order to really go after Intel. 

A secondary part of that requirement is that you need to have something to manufacture at older fabs before you upgrade them to help extend the value of your investment.  By acquiring ATI, chipsets and even some GPUs can be manufactured at older fabs before they need to be transitioned to newer technologies (e.g. making chipsets at Fab 30 on 90nm while CPUs are made at Fab 36 at 65nm). 

Once the New York fab is operational, AMD could have two state of the art fabs running the smallest manufacturing processes, with one lagging behind to handle chipset and GPU production.  The lagging fab would change between all three fabs, as they would each be on a staggered upgrade timeline - much like how Intel manages to keep its fabs full.  For example, Intel's Fab 11X in New Mexico is a 90nm 300mm fab that used to make Intel's flagship Pentium 4/D processors, but now it's being transitioned to make chipsets alongside older 90nm CPUs while newer 65nm CPUs are being made at newly upgraded fabs. 

Presently, AMD has no plans to change the way ATI GPUs and chipsets are manufactured.  ATI's business model of using TSMC/UMC for manufacturing will not change for at least the next 1 - 2 years, after which AMD will simply do what makes sense.

What if GPUs and CPUs Become One

If GPUs do eventually become one with CPUs as some are predicting, then the ATI acquisition would be a great source of IP for AMD.  For Intel, getting access to IP from companies like ATI isn’t too difficult, because Intel has a fairly extensive IP portfolio that other companies need access to in order to survive (e.g. Intel Bus license).  The two companies would simply strike out a cross licensing agreement, and suddenly Intel gets what it wants while the partner gets to help Intel sell more CPUs.

AMD doesn’t quite have the strength of Intel in that department, but by acquiring ATI it would be fairly well prepared for merging CPUs and GPUs.  The process doesn't have to be that extreme, however.  Remember AMD's Torrenza announcement back at its June 2006 analyst day?  Part of the strategy included putting various types of "accelerators" either in a Hyper Transport slot or on-package with an AMD CPU, not necessarily on-die.

 

Conveniently, the "accelerator" blocks are all colored red in AMD's diagram, but you can see many areas that ATI's IP could be used here.  AMD could put ATI's Avivo engine in the chipsets for HTPC or CE applications, you could find an ATI GPU in a HTX slot or integrated on the CPU package.

We're moving to quad-core CPUs next year, and there is definitely some debate about how useful that will truly be for the home computer user.  Beyond quad cores, what do CPU manufacturers do to continue to sell product?  Ramping up clock speeds is becoming more difficult, and while two cores definitely shows some promise, and four cores can be useful, it's really difficult to imagine a computing environment at this point where the typical user needs four or more CPU cores.  Long-term, throwing more cores on could give way to putting a GPU into the core, and given the nearly infinitely parallel nature of graphics it becomes a bit easier to make use of additional transistors.  Remember that ATI and NVIDIA both have flagship products with over 300M transistors, while AMD is currently using about half that for the 2x512K X2 chips.  Core 2 4M is close to 300M transistors, but a large number of those are devoted to cache, and doubling cache quickly has diminishing returns.

A Great Way of Penetrating the CE Market

Intel had a huge showing at this year’s Consumer Electronics Show (CES) in Vegas, making very clear its intentions to be a significant force in the CE market moving forward.  AMD unfortunately has very little recognition or penetration in the CE market, but buying ATI would change all of that.  Aside from the fact that ATI is in Microsoft’s Xbox 360, an item that Microsoft wants to be entrenched in the Digital Home, ATI silicon is also used in many digital televisions as well as cell phones.  By acquiring ATI, AMD would be able to gain entry into the extremely lucrative CE market. 

If the world of convergence devices truly do take off, AMD's acquisition of ATI would pay off as it would give AMD the starting exposure necessary to make even further moves into the CE market. 

ATI's Position

Obviously ATI is also very excited about the acquisition, but from ATI's perspective the motivations for and benefits of the acquisition are a bit different.

ATI's goal is to continue to grow at a rate of 20% per year, but maintaining that growth rate becomes increasingly more difficult as an independent GPU manufacturer. The AMD acquisition will give ATI the ability to compete in areas that it hasn't before, while also giving the company the stable footing it needs to maintaining aggressive growth.

From ATI's position, it's NVIDIA that is left out in the cold as Intel is surely not going to support NVIDIA enough to be a truly great partner. ATI will have AMD, and Intel is content being fairly self sufficient, so unless NVIDIA becomes a CPU manufacturer, its future is bleak according to ATI.

Preparing for the Inevitable Confrontation with Intel

From ATI's standpoint, it's only a matter of time before the GPU becomes general purpose enough that it could be designed and manufactured by a CPU maker. Taking the concern one step further, ATI's worried that in the coming years Intel will introduce its standalone GPU and really turn up the heat on the remaining independent GPU makers. By partnering with AMD, ATI believes that it would be better prepared for what it believes is the inevitable confrontation with Intel. From ATI's perspective, Intel is too strong in CPU design, manufacturing and marketing to compete against when the inevitable move into the GPU space occurs.

Competing with NVIDIA is Tough, this Makes it Easier

It's no surprise to anyone that competing with NVIDIA isn't easy; the easiest time ATI had competing with NVIDIA in recent history was back during the Radeon 9700 Pro days, but since then NVIDIA has really turned up the heat and currently enjoys greater desktop market share. Not only does it have greater desktop market share, but NVIDIA also enjoys greater profit margins per GPU sold thanks to smaller die sizes. By being acquired by AMD, ATI gets a bit of relief from the competition with NVIDIA, as well as some potential advantages. Those advantages include the potential to build and execute better AMD chipsets as well as gaining greater overall graphics market share by shipping more platforms with integrated graphics (either on CPU or on chipset). Intel is actually the world's largest graphics manufacturer, since the vast majority of Intel systems sold ship with some form of Intel integrated graphics; through this acquisition, AMD can use ATI to do the same, which should increase ATI's overall market share.

Making Better AMD Chipsets

ATI has struggled to design, manufacture and execute a chipset that could compete with NVIDIA's nForce line. To date, ATI has come close but not been able to close the deal and it has been trying for years. In theory, with better access to AMD engineers and designers, being able to leverage AMD's IP (e.g. CrossFire implemented over Hyper Transport) and eventually being able to use AMD's fabs, ATI could design a truly competitive platform for AMD processors. As long as the product is decent, AMD would also be able to significantly increase sales by simply offering attractive platform bundles similar to what Intel does today. Whether the approach is more similar to Centrino where AMD requires that you purchase only AMD silicon, or more like how Intel does business on the desktop side where AMD makes sure that only its chipsets are available at launch has yet to be seen.

The Manufacturing & Design Advantage

Currently both ATI and NVIDIA have to turn to third party manufacturers to produce both their chipsets and GPUs. If this acquisition were to go through, AMD could eventually begin manufacturing some chipsets or GPUs for ATI. By manufacturing components in house, ATI would be able to enjoy a cost advantage over competing NVIDIA products (especially if ATI is simply using leftover capacity at older fabs that are awaiting transition to smaller manufacturing processes). ATI could potentially begin to release GPUs using newer process technologies before the competition as well, reducing die size and increasing clock speeds at the same time.

Manufacturing aside, there's also this idea that companies like AMD and Intel are better at designing silicon because they work on a more granular level with the design. There's far more custom logic in Intel's Core 2 Duo than in NVIDIA's GeForce 7900 GTX; ATI would gain access to AMD's entire portfolio of custom logic and may be able to implement some of it in its upcoming GPUs, giving ATI a performance and efficiency advantage over NVIDIA.

It Makes Financial Sense

Of course the actual acquisition itself is very beneficial to ATI's investors, as the deal is mostly cash and thus little risk is assumed on behalf of ATI investors. ATI's stock has been doing quite well since the announcement, and why shouldn't it? The #2 x86 microprocessor maker wants to buy ATI.

What about Intel Chipsets?

Currently 60 - 70% of ATI's chipset revenues come from Intel platforms, but ATI expects that number to decline significantly over the coming months. While the current 6 month roadmap won't change, beyond that ATI is not counting on incredible support from Intel so ATI will begin focusing its efforts on AMD platforms exclusively at that point. If Intel wants ATI chipsets, ATI will supply them. And if you're wondering, CrossFire will continue to work on Intel chipsets.

Keep in mind that when we say 60-70% of ATI's chipset revenues come from Intel platforms, that doesn't actually mean ATI is selling a ton of chipsets. ATI accounts for slightly less than 10% of Intel platform chipsets sold recently, and about one fourth of AMD platform chipsets. However, even though they sell a decent number of chipsets, the quality of ATI chipsets has been considered something of a distant third place, with Intel and NVIDIA in the lead. ATI could lose all of their Intel chipset sales and still come out ahead if they can become the dominant chipset for AMD platforms.

NVIDIA’s Position

The mood around NVIDIA's offices the day of the AMD/ATI announcement was one of joy.  There was no tone of worry or words of concern; you just got the feeling that every NVIDIA employee you talked to had a grin on their face that day.  As far as NVIDIA is concerned, the move is ATI admitting defeat, coming to terms that it cannot compete with NVIDIA and needs to get out.  Obviously, we are talking about ATI's competitor and there is a certain amount of PR going on, but let's take a closer look at the NVIDIA perspective.

The Graphics Market is Ours

NVIDIA basically feels ATI is ceding over control of the GPU market.  They feel AMD is not going to be as interested in cut throat competition between itself and NVIDIA.  If the deal goes through, NVIDIA will become the sole independent provider of GPUs to the industry. 

To NVIDIA, this merger doesn't have anything to do with on-die GPUs, as AMD didn't need to buy a company to accomplish this.  Intel has been manufacturing "good enough" integrated graphics chipsets for years, and it also tried to go down the path of an on-die GPU with the failed Timna project.  For those of you that don't remember, Timna was going to be Intel's system on a chip complete with on-die graphics, designed to target the sub-$600 PC market.  However just before Timna's release, the plug was pulled as the average selling prices of PCs were in free fall with no bottom in sight.  The Timna team was then tasked to create an efficient mobile processor called Banias, which eventually led to the development of Intel's latest Core 2 processors. 

From NVIDIA's standpoint, the acquisition also has nothing to do with gaining the ability to use more custom logic or being able to manufacture GPUs in house.  For starters, both ATI and NVIDIA can produce their own custom logic driven GPUs if they put in the resources; AMD isn't the only one that can design custom logic.  And from the manufacturing standpoint, since the fabs will always give preference to CPUs leaving the older fabs over manufacturing GPUs, there's not really any disadvantage to just manufacturing at a 3rd party foundry like TSMC. 

What if Intel Makes GPUs?

From NVIDIA's perspective, last time it checked, none of its GPU designers got hired by Intel, so unless that changes NVIDIA will continue to be a dominant leader in the GPU business regardless of whether or not Intel decides to enter the discrete graphics market.  While Intel can integrate very low end graphics cores with its chipsets, it's not as easy to do the same with mid range or high end graphics. 

The AMD/ATI acquisition leaves NVIDIA as the only independent GPU/platform company that provides technology to both AMD and Intel.  In the words of NVIDIA’s Dan Vivoli, Executive VP of Marketing, "we're comfortable competing with Intel in the GPU market.  It's our home court". Vivoli added that "last I checked, none of our nForce engineers are part of the merger.  We will have to continue to build leading MCP technology just like before". 

Vivoli’s attitude towards the situation is quite pragmatic.  Basing corporate direction over the potential threat of a company like Intel that has never been able to produce a successful high-performance GPU is a bit panicky.  He added in closing, "likewise, nothing has changed on the Intel front.  We will continue to have to innovate in order to offer better value than Intel.  It's a world we are comfortable and familiar with." 

Two Wrongs don't make a Right

The way the market currently stands is this: Intel and NVIDIA are the stronger marketing companies, and they have a history of better execution than their competitors.  The acquisition is combining the two runners up in their respective industries; to expect the outcome to be this one tremendous power is wishful thinking at best. 

NVIDIA has been building great technology for years now, and none of its engineers went to ATI/AMD, so what is fueling the belief that AMD/ATI can somehow build and execute this perfect chipset?  Remember that AMD is not like Intel in that it is far more open with its partners, making NVIDIA's job of designing chipsets for AMD CPUs not as difficult as it is on the Intel side of things.  AMD has publicly stated that the ATI acquisition will not change how it works with NVIDIA, so as long as that's true then NVIDIA should be able to continue to build world class products for AMD. 

AMD Still Needs Us (and we need AMD)

Currently NVIDIA ships many more AMD chipsets than it does Intel chipsets, but that may begin to change with the release of Intel's Core 2 processors.  In the future, competition for AMD platforms may end up resembling the desktop GPU market, with ATI and NVIDIA each taking about 50% of AMD chipset sales. 

How do you like our Brands?

Not only does AMD still need NVIDIA, but Intel does too.  NVIDIA has a number of very strong brands that you really can't get good competition to from anyone else: GeForce, nForce, Quadro and SLI are all things NVIDIA is well recognized for, and that will continue for the foreseeable future.  Unless Intel can come out with its own high end graphics and multi-GPU offerings, it needs NVIDIA's support.  NVIDIA also understands that dining with Intel is much like dining with the devil: the food may be great but you never know what else is cooking in the kitchen.  NVIDIA will surely have a plan of its own to remain competitive in the worst case scenario, and partnering with Intel isn't in the cards. 

Intel’s Position: The Silent Treatment

Of all the manufacturers we talked to, Intel was the least forthcoming with information.  At the same time, Intel was the least impacted by the AMD/ATI announcement.  Intel already has a thriving chipset and motherboard business, not to mention that Intel is currently the largest supplier of graphics for PCs.  Intel is, at least publicly, taking the "we'll have to wait and see" stance to the acquisition, stating numerous times that the deal is not final and that anything could happen between now and then. 

Intel also stated that nothing has changed yet and for one, ATI's bus license has definitely not been revoked.  Intel also made it clear to state that its relationship with AMD/ATI/NVIDIA could change before the deal goes through, just not immediately.  Believe it or not, that's all we got out of Intel.

Understanding the corporate mindset and recognizing that Intel is the 800 pound gorilla in this discussion, its perspective isn't all too surprising.  Intel has the fastest current desktop CPU and sells a ton of chipsets, GPUs (if you count the integrated stuff as a GPU), CPUs, and motherboards.  In many ways, this merger is a lot about AMD trying to compete with Intel.  Despite the lack of outgoing information, you can be sure that the impact of this merger is being discussed in great detail within Intel, and as always it is going to try to plan out its best future course.  Intel’s "no comment" stance is what one would expect from a huge corporation when asked about the activities of its chief competitor.

Our Thoughts

Obviously each of the four companies we talked about today had their own take on the merger and no one here can really predict where things will go.  On the one extreme, this deal could completely change everything; the combination of AMD and ATI could result in a powerhouse finally able to really compete with Intel while at the same time taking serious market share away from NVIDIA.  On the other extreme, the combination could be a mess, resulting in a bloated company that is not much better off than before, with Intel and NVIDIA standing to reap the greatest rewards.  It's far too early to tell and with the deal not even closed yet, there's no sense in counting any chickens. 

That being said, there are some points we feel are worth discussing, and some analysis that can help give perspective to the whole merger.  A lot of what we've presented so far is the company line from the four major CPU/Chipset manufacturers, and clearly there is going to be some bias in how each views the situation.  It's far too easy to look at only one side of this story, so the following is designed to help examine the pros and cons of a handful of the facets of this merger.

Integrated Graphics is about to get Better

There's one definite outcome from the AMD/ATI deal, and that is an increase in the quality of integrated graphics.  Currently, Intel is relatively unchallenged when it comes to integrated graphics solutions; independent GPU manufacturers like ATI and NVIDIA offer better integrated graphics solutions, but at much higher prices to keep their margins high.  If AMD acquires ATI, we could in theory see an AMD platform with integrated graphics that would significantly outperform a similarly priced integrated Intel platform - hopefully this will force Intel to improve its integrated graphics. 

Taking things one step further: if AMD puts a small ATI graphics core on-die or at least on-chip, the performance expectations for integrated graphics solutions would go up once more.  Remember that one strength consoles have is the extremely low latency, high bandwidth interconnect between the CPU and GPU; a highly integrated CPU/GPU combo would be able to deliver that same performance advantage on a relatively low end PC. 

Cool Stuff is Coming

On the investor call where AMD officially announced its plans to acquire ATI, a common theme discussed was AMD's Torrenza strategy.  As AMD announced at its analyst day back in June, AMD plans on openly licensing its coherent HyperTransport bus allowing for companies like ATI or NVIDIA to develop GPUs and other co-processors that would plug into a Hyper Transport slot on a motherboard.  The benefit is a very low latency, cache coherent interface between the CPU and any other device that it needs to feed large amounts of data to.  With ATI operating under AMD's wing, AMD effectively guarantees that we'll see GPUs take advantage of Torrenza. 

Our Thoughts: Will AMD manufacture ATI GPUs? 

One of the most intriguing aspects of this proposed acquisition is the potential for ATI to cease to be a fabless GPU manufacturer.  In the past, fabless companies like ATI and NVIDIA have had to rely on foundries like TSMC or UMC in order to manufacture their chip designs.  By relying on a 3rd party to manufacture all of their chips, ATI and NVIDIA avoid having to invest in multi-billion dollar fabs that require continued multi-billion dollar investments to stay up to date.  As a point of reference, AMD's Fab 36 cost $2.5 billion dollars and that's before even fully being converted to 65nm. 

The upside of being a fabless manufacturer is obviously that you leave manufacturing to those who are good at it; the downside is that you lose manufacturing as a competitive advantage.  The other downside is that foundries like TSMC aren't as quick to transition to new process technologies as companies like AMD and Intel.  While Intel has been shipping 65nm product for quite a while now, ATI and NVIDIA GPUs are still being built using 90nm transistors.  If the buyout does go through, ATI could potentially gain a manufacturing advantage over NVIDIA since AMD has already invested in its own fab plants. 

On the surface, the potential for ATI to have access to its own fab is tremendous; however, there are a number of limitations to success that are worth talking about.  For starters, AMD isn't Intel, and AMD's manufacturing processes have always lagged behind Intel's, which is why AMD is still currently shipping 90nm CPUs while Intel is in the middle of its 90nm to 65nm transition.  So the advantage that ATI would gain from having access to its own fab would not be as significant as if Intel were the buyer.  AMD should still be slightly ahead of TSMC and UMC, but Intel is almost one year ahead of AMD right now on the process transitions.

The other problem is that AMD is significantly capacity constrained as is.  AMD currently has two fabs of its own, Fab 30 and Fab 36, both in Dresden currently producing 90nm CPUs.  Fab 30 is set up for production on 200mm wafers while Fab 36 uses 300mm.  AMD just recently started shipping revenue generating parts through Chartered Semiconductor, a 3rd party fab that is manufacturing Athlon 64 CPUs for AMD in order to help relieve some of its capacity constraints.  So with Fab 30, Fab 36 and Chartered all working to just meet demand for AMD's CPUs, it's not like AMD has a lot of extra capacity to use to manufacture ATI GPUs. 

AMD's new fab in New York State will help deal with some of the capacity issues, but construction won't even begin until July 2007 at the earliest and we're looking at another 3 - 5 years before it's operational.  Without tons of excess capacity, it doesn't seem like ATI will be able to benefit from AMD's manufacturing facilities in the production of GPUs.  Chipsets are a different story as it will give AMD something to do with older fabs, as chipsets are no where near the size of modern day GPUs and are already produced on an n-1 manufacturing process (e.g. Intel's Core 2 processors are 65nm while Intel's P965 chipset is built on a 90nm process).  GPUs could also be manufactured at older fab plants as newer ones are upgraded, though the sheer size of modern day GPUs makes this an uncertain option.  More than likely, the only GPUs  manufactured at AMD's plants would be those integrated into chipsets or found on-die/on-package with AMD CPUs, meaning that they'd be very low end, low margin parts. 

AMD has already announced that at least for the next 1 - 2 years, there will be no changes in manufacturing with AMD or ATI, meaning that ATI will continue to produce GPUs and chipsets at TSMC and UMC, while AMD will continue to produce CPUs at Fab 30, Fab 36 and Chartered.  After that period of time, we'd venture a guess that AMD would start bringing some manufacturing in house (e.g. chipsets) or start producing CPUs with integrated graphics (either on-die or on-package). 

What AMD is doing with the proposed ATI acquisition is taking one step towards becoming more like Intel.  Intel currently has four 200mm 130nm fabs that are producing chipsets (anything older than Intel's 965 chipset); those fabs would have been useless for CPU production so the fact that Intel can get some additional life out of them by using them for chipset production helps amortize their high construction costs.  When the chipsets are ready to transition from 130nm to 90nm, these fabs can then be upgraded to 65nm to get ready for the next wave of chipsets they will be producing. 

While ATI will give AMD something to do with older fabs, there's also the argument that AMD could have become a chipset manufacturer on its own without having to pay $5.4B for ATI.  AMD has manufactured chipsets in the past, and one would think that it would be cheaper to hire engineers and construct your own chipset team than it would be to purchase ATI.  Obviously there's additional value that ATI brings to the table above and beyond the chipset, so it may just be that the sum of all of ATI's advantages are what make the acquisition sensible to AMD. 

Our Thoughts: The GPU Side

The AMD/ATI acquisition doesn’t make a whole lot of sense on the discrete graphics side if you view the evolution of PC graphics as something that will continue to keep the CPU and the GPU separate.  If you look at things from another angle, one that isn’t too far fetched we might add, the acquisition is extremely important. 

Some game developers have been predicting for quite some time that CPUs and GPUs were on this crash course and would eventually be merged into a single device.  The idea is that GPUs strive, with each generation, to become more general purpose and more programmable; in essence, with each GPU generation ATI and NVIDIA take one more step to being CPU manufacturers.  Obviously the GPU is still geared towards running 3D games rather than Microsoft Word, but the idea is that at some point, the GPU will become general purpose enough that it may start encroaching into the territory of the CPU makers or better yet, it may become general purpose enough that AMD and Intel want to make their own.

It’s tough to say if and when this convergence between the CPU and GPU would happen, but if it did and you were in ATI’s position, you’d probably want to be allied with a CPU maker in order to have some hope of staying alive.  The 3D revolution killed off basically all giants in the graphics industry and spawned new ones, two of which we’re talking about today.  What ATI is hoping to gain from this acquisition is protection from being killed off if the CPU and GPU do go through a merger of sorts. 

The NVIDIA GeForce 256 was NVIDIA's first "GPU", offloading T&L from the CPU. Who knows what the term GPU will mean in 5 years, will it be a fully contained within today's CPUs?

ATI and NVIDIA both seem to believe that within the next 2 - 3 years, Intel will release its own GPU and in a greater sense than their current mediocre integrated graphics.  Since Intel technically has the largest share of the graphics market thanks to their integrated graphics, it wouldn’t be too difficult for them to take a large chunk of the rest of the market -- assuming Intel can produce a good GPU.  Furthermore, if GPUs do become general purpose enough that Intel will actually be able to leverage much of its expertise in designing general purpose processors, then the possibility of Intel producing a good GPU isn’t too far fetched. 

If you talk to Intel, it's business as usual.  GPU design isn’t really a top priority and on the surface everything appears to be the same.  However, a lot can happen in two years -- two years ago NetBurst was still the design of the future from Intel.  Only time will tell if the doomsday scenario that the GPU makers are talking about will come true. 

The Platform

Acquiring ATI amounts to a quick (but expensive) way of filling in the gaps in AMD's current business.  AMD has already proved that it can compete technologically with Intel, and is currently working on fixing the problems with being able to compete in terms of manufacturing ability as well.  By acquiring ATI, AMD will have the talented workforce necessary to produce its own chipsets/motherboards with integrated graphics and engineer some very unique hybrid CPU/GPU platforms using Torrenza.

There are other ways AMD could have gone about attaining the same goal, for example by building its own workforce and IP rather than spending the $5.4 billion dollars necessary to acquire ATI's, but the acquisition approach is arguably quicker and allows AMD to focus on reaping the benefits sooner, not to mention that it leaves AMD better prepared for the future if GPUs do grow closer to the CPU. 

Intel has created the perfect example of how to be a successful microprocessor manufacturer, and its platform focus is one key element of that example.  The ATI acquisition, in many ways, is about following Intel's example and improving wherever AMD can. 

Can't We All Just Get Along?

The one element of this acquisition that you don't read about in press releases, is what it takes to actually make it happen.  It's not always easy to get a bunch of people from varying backgrounds and with various interests to work well together, it's even more difficult to take two well established and fully operational companies and expect to combine the workforces into one.  While direction for the combined company will come from both AMD and ATI senior management, making that translate into a well oiled machine that can not only innovate but execute great products is quite difficult. 

Having each company operate entirely independently makes no sense, since we've already discussed that it's what these two can do together that makes this acquisition so interesting.  AMD and ATI have to work as one company, but getting from where both companies are today to the point where they are one single harmonious entity (or at least as much as Intel) is going to be a very long and difficult process. 

One fundamental hurdle is that neither AMD nor ATI have particularly strong marketing, at least compared to their competitors.  Both Intel and NVIDIA have arguably done a much better job at marketing their products, building brands and gaining mind share.  We are concerned about the marketing direction that the new AMD would take, especially considering that in many ways ATI has the stronger PR/marketing focus.  At least from our dealings with the two companies, ATI gives more importance to its PR/marketing teams than AMD does, which is cause for concern since it is AMD buying ATI and not the other way around.  Only time will tell if AMD will assimilate ATI into its way of thinking, or if both companies will be able to use this acquisition as an opportunity to learn from one another.  We all know what the sensible choice would be, but getting thousands of people to agree on the same thing tends to complicate things. 

The one perspective that is easiest to support right now is Intel's "let's wait and see what happens" view.  Even with all this talk about the potential merger, the benefits, the pitfalls, etc. the reality is that right now all we have is a proposed merger.  It's certainly big news to even have such an acquisition out in the open, but until the final ink is dry many people remain skeptical.  It really wouldn't be too shocking to see the whole merger evaporate and for ATI and AMD to just continue on their present, independent paths -- certainly no more surprising than the initial announcement.