Analysis: A year later, AMD tuning out distractions to bring ATI fully on board

Worldwide lawsuits against Intel Corp. and four straight quarterly losses have distracted Advanced Micro Devices Inc. during its integration of ATI Technologies Inc., but the merger remains on track, according to industry analysts.

AMD's acquisition of ATI for $5.4 billion, announced in July 2006 and completed on Oct. 25, 2006, was viewed as a potent weapon in AMD's attempt to dent Intel's domination of the x86 processor market.

The lawsuits against Intel and financial losses came at a critical time, when AMD's management needed help in integrating the ATI acquisition and making ATI employees understand AMD's culture, said Jon Peddie, president of Jon Peddie Research.

AMD filed antitrust lawsuits alleging monopolistic behavior against Intel in the U.S. and Japan, and lodged complaints with the European Commission, the Korean Fair Trade Commission and Japan Fair Trade Commission.

The distraction was compounded by the departure of key executives, including David Orton, former president and CEO of ATI, who resigned as executive vice president of AMD in July after only 10 months.

AMD didn't have any internal problems, and Orton left on his own accord, Peddie said. "A little redundancy will always occur in all organizations. It's not surprising to see people shift," Peddie said. However, outside speculation about the departure may have distracted AMD during the integration, he said.

AMD also took an acquisition-related charge of $76 million, or 14 cents per share, in the third quarter of 2007 ended Sept. 29. That added to the quarterly net loss of $396 million.

Despite the distractions, AMD is pulling its resources together to ensure that the ATI merger goes smoothly.

"The merger has allowed AMD to merge its plans with ATI, which were very similar prior to the acquisition." Peddie said. Both companies wanted to amalgamate the CPU with the graphics processor, and the acquisition puts them in a position to do so.

A successful merger could help AMD reach profitability in a few quarters and position it for success in the future, wrote Doug Freedman, an analyst at American Technology Research Inc., in a research report.

"We believe ATI is turning the corner, which is likely material to AMD's quest for profitability," Freedman wrote.

The acquisition of ATI hasn't shown an immediate benefit, but could help AMD in the long term when the company's "Fusion" project comes to fruition, Peddie said. Fusion is the code name for AMD's next-generation processor design that is expected to combine high-performance graphics and CPU processing on a single die. The project was announced when the merger was completed. AMD is not prepared to talk about Fusion yet, but the goal is to bring the cost of PCs down and reduce power consumption, Peddie said.

AMD also announced the "Spider" system, which will include AMD's upcoming Phenom chips and high-end graphics processors to provide users with the "ultimate visual experience" in computing, said Dirk Meyer, AMD's president and chief operating officer, on the company's recent third-quarter earnings call.

With all the attention focused on Phenom and Spider, ATI's involvement in other businesses has gotten sidetracked, said Phil Hester, senior vice president and chief technology officer at AMD. AMD's ATI unit is a big player in supplying graphics to consumer electronics, set-top boxes and gaming consoles, Hester said. ATI supplies graphics processing units (GPU) for Microsoft Corp.'s Xbox 360 and Nintendo Co.'s Wii consoles, Hester added.

"Discrete GPUs will continue to be a good business for us," Hester said. AMD's graphics segment revenue grew 29%, to $252 million sequentially, driven by the success of the ATI Radeon HD 2000 series of graphics processors.

However, ATI's market share in the discrete graphics market has been hit by manufacturing problems and bad timing in bringing chips to market, Peddie said. Competitors such as Nvidia Corp. and Silicon Integrated Systems Corp. stepped up by shipping graphics chips on a more timely basis, taking market share away from ATI.

"Market share could begin to swing back towards ATI even if it introduced simply comparable products to Nvidia in the near term," wrote Doug Freedman in a research report. ATI's RV670 graphics card is competitive in the mainstream market with current Nvidia products, Freedman wrote.

But AMD still has work to do to make the merger a success. Its biggest threat remains Intel, which maintains a stranglehold on the chip market.

"AMD must rebuild its brand value in the enthusiast market in order to garner better mainstream adoption and consumer recognition," Freedman wrote.

Copyright © 2007 IDG Communications, Inc.

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