ATI Tech Investors Enjoy Ride on Rumor Mill

Updated from 4:26 p.m. EDT

A rumored marriage between chipmakers AMD (AMD) and ATI Technologies (ATYT) may be little more than idle speculation.

A sell-side analyst pronounced the merger "likely" in a research report on Wednesday, giving a big boost to ATI's shares. But other analysts familiar with the graphics chip market say investors are making much ado about nothing.

"Forget it," says Jon Peddie, founder and analyst of Jon Peddie Research, an industry consulting firm. The report "is such a waste of time."

Apjit Walia, an analyst with RBC Capital Markets, based his merger projections on channel checks in the "PC food" chain. Speculation about a merger between one of the graphics-chips makers such as ATI and one of the microprocessor manufacturers such as AMD has a long history, acknowledged Walia, whose firm has not done any recent investment-banking business for ATI or AMD. But Walia's research indicates that this merger is actually going to happen, he wrote.

However, the analyst gave no details in his report about what he'd heard or who he'd heard the rumor from. Instead he simply argued that a deal would "make sense."

"The synergies of this seem consistent with the recent announcements by AMD to significantly increase capacity over the next few years," Walia said in the note.

But a deal between the two companies could take many forms other than a merger, including a partnership or a joint venture, Walia said in an interview. Whether a "tie-up" between the two companies makes sense or not, Walia said he's just reporting what he has heard.

"The proof's in the pudding," he said. "Let's let time pass and see how it works out."

The report was enough for investors. Shares of ATI closed up $1.36, or 9%, to $16.51. Earlier in the day, they traded up as much as 10.3%. Shares of AMD closed up 41 cents, or 1.4%, to $30.98.

ATI spokesman David Erskine dubbed the report about a possible merger a rumor and said the company doesn't comment on rumors. An AMD representative did not return a call seeking comment.