Updated from 4:26 p.m. EDT
A rumored marriage between chipmakers
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.
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.
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
, 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.