ATI Tech Investors Enjoy Ride on Rumor Mill

Other analysts have a list of reasons why the rumored deal makes little sense.

AMD has neither the cash nor the management resources to acquire ATI, says Peddie. At the end of ATI's first quarter in March, it had about $2.6 billion in cash and short-term investments. In contrast, ATI has an enterprise value -- market capitalization minus cash -- of about $3.6 billion.

AMD announced earlier this week that it would spend $2.5 billion over the next three years to expand its chip fabrication plants in Germany, meaning that cash is going to be a precious commodity for the company in coming years, notes Peddie.

"AMD doesn't have the resources to spare to go out on an adventure like buying ATI," says Peddie. "It doesn't have any cash to spare and can't afford to give its stock away."

To be sure, AMD could potentially raise money or issue new stock to make the acquisition, but analysts say it has little incentive to do so.

Ostensibly, by acquiring ATI, AMD would be getting a new product to produce in its chipmaking plants. But AMD's problem in recent years hasn't been under-using capacity; it's been that it can't make enough of its own chips to meet demand, says one technology analyst at a financial services firm who has closely followed the graphics-chip market.

"They would kill their mother" to get more capacity, says the analyst, who asked not to be named, but whose firm has not done investment banking for either company.

AMD is building new capacity, but it's able to sell its own chips for a gross profit margin of about 60%. In contrast, ATI's chips have a gross margin of around 30% or so. It would make little sense for AMD to fill up the capacity of its new plants with chips that have lower margins than its own processors, particularly when there's such strong demand for its own chips, the analyst says.

"AMD is not in any way short of things to fill its fabs, especially low-margin things," says the analyst. "The logic of it doesn't make sense."

But more than that, the investment that the graphics-chip companies are constantly putting into developing the next generation of processors is essentially free research and development for AMD and Intel (INTC), says the analyst. The new graphics chips help drive PC sales, and thus sales of CPUs from AMD and Intel -- without any investment from the two big chipmakers. Instead, Intel and AMD can worry primarily about improving their CPUs, which in some ways is a much less complicated task, says the analyst.

"It's almost the perfect situation for Intel and AMD," says the analyst.

And then there's the big question about just how good a fit the two companies would be. They're based in different countries -- AMD in Silicon Valley, ATI outside Toronto -- with distinctly different products, different business models and different cultures, analysts note.

AMD buying ATI would be "like a dog chasing a truck. What does it do when it catches it?" asks Peddie.

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