AMD Agrees to Buy ATI in $5.4 Billion Deal

By Mark Hachman

On Monday, AMD agreed to acquire graphics powerhouse ATI Technologies in a surprise $5.4 billion deal that will radically alter the landscape of the PC component industry.

ATI will become "the ATI business division," within AMD, and its chief executive and president, Dave Orton, will become an executive vice president reporting to both AMD president and chief operating officer Dirk Meyer and AMD's chief executive, Hector Ruiz. The deal, if agreed to by shareholders, will total $4.2 billion in cash and 57 million shares of AMD common stock, which the company is valuing at $18.26 per share.


The combination would create a company with an estimated $7.3 billion in sales. ATI said it has received an opinion from its financial advisers that the transaction from a financial point of view is fair to its shareholders. Meanwhile, AMD said it expects that the transaction will be slightly accretive to earnings in 2007, and "meaningfully accretive" in 2008. Shareholders from both companies must still approve the transaction, which would then most likely be finalized during the fourth quarter of 2006, AMD said.

In a statement released ahead of a conference call with reporters scheduled for 8 AM EDT, AMD said that in 2007 the two companies would deliver "customer-centric platforms," specifically in the commercial and mobile computing segments and the growing consumer-electronic's market.

"ATI shares our passion and complements our strengths: technology leadership and customer-centric innovation," AMD's Ruiz said in a statement. "Bringing these two great companies together will allow us to transcend what we have accomplished as individual businesses and reinvent our industry as the technology leader and partner of choice. We believe AMD and ATI will drive growth and innovation for the entire industry, enabling our partners to create differentiated solutions and empowering our customers to choose what is best for them."

The deal will combine ATI's established core logic and graphics expertise with AMD's microprocessors. Both ATI and AMD trail Intel in their respective segments, although the graphics market can be assessed in different ways; while Intel still holds a significant lead over ATI and rival Nvidia in total graphics chips shipped, Intel's edge disappears if integrated graphics/core logic chips are factored out of the equation. What the future will hold, however, is still somewhat vague.

"In 2008 and beyond, AMD aims to move beyond current technological configurations to transform processing technologies, with silicon-specific platforms that integrate microprocessors and graphics processors to address the growing need for general-purpose, media-centric, data-centric and graphic-centric performance," AMD said in a statement.



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The deal was not expected, primarily because AMD had always positioned itself as a vendor that allowed its customers a choice of components. Intel's Centrino platform combines a processor, chipset, and communications chip.

That would seem to indicate that either ATI or AMD will see to develop communications processors, or else put a number of communications chip companies in play. AMD has traditionally encouraged its OEM vendors to buy components from both Atheros and Broadcom.

AMD has also historically struggled with debt as it struggled to build new fabs to compete with Intel, which has traditionally held more than five times the market share of AMD in the PC microprocessor space, and has sold core logic and communications chips to boot.

However, AMD said it will fund the acquisition through a combination of cash and new debt. AMD obtained a $2.5 billion term loan commitment from Morgan Stanley Senior Funding Inc., which, together with combined existing cash, cash equivalents, and short term investments balances of approximately $3.0 billion, provides full funding for the transaction, AMD said.

AOL To Unveil Yet Another Plan To Save Itself

By Kenneth Li, Reuters
NEW YORK (Reuters)—Investors in Time Warner Inc., whose shares touched a two-year low in mid-July, are seeking signs of a turnaround on August 2, when the world's largest media company is set to introduce its fourth plan in five years to save its online unit AOL.

AOL is widely expected to announce that it will give its e-mail and Web services away for free, hoping to win back customers who had switched to other free services from rivals like Google Inc. and Yahoo Inc.

The new strategy, which will be discussed at a Time Warner board meeting in New York on Thursday, aims to boost online advertising sales, but analysts say it is a risky move as its subscription business currently accounts for 80 percent of AOL's revenue.

AOL is still expected to continue to charge for dial-up Internet access, but it will no longer advertise the service.


"I think a lot is riding on August 2," said Larry Haverty, a portfolio manager at Gamco Investors, which owned 14.1 million shares of Time Warner as of March 31. "People like us have been patient with strategy. From what I've heard, I'm comfortable.

"But seeing is believing," Haverty added.

Once the reigning king of online services, AOL has lost about 30 percent of its subscribers since 2003. The 2001 merger of AOL and Time Warner has been blamed for destroying some $200 billion in market value.

Free services are now viewed by some investors as the only hope of survival for AOL in a world dominated by faster-moving companies, including News Corp.'s MySpace.com.

"They should have done what they contemplated two years ago to aggressively develop AOL as a web service," said Morris Mark at Mark Asset Management, which owns 1.22 million Time Warner shares as of March 31. "Its position is so much more powerful than the advertising revenue that they're generating.

Time Warner's enterprise value trades at 7.6 times its expected 2007 earnings before interest, tax, depreciation and amortization, compared to News Corp.'s 11.9 multiple and Walt Disney Co.'s 9.81 multiple.

TOO LATE?

Gamco's Haverty hopes Time Warner's online advertising sales will rise at least 30 percent, when the company posts its second quarter results on Aug 2.

That would put AOL roughly on par with Yahoo, but still lag Google's 77 percent advertising growth in the second quarter.

AOL strategists may be emboldened to act aggressively after a 26 percent growth in online ad sales in the first quarter.

But a Wall Street Journal report earlier this month cited unnamed sources as saying Time Warner could lose up to $1 billion through 2009 from its plan to offer free services.

Time Warner on July 11 dismissed the report and called the newspaper's assessment "incomplete" and laden with "largely erroneous financial information."

Six days later, its stock had slipped to a two-year low.

"Time Warner's stock chart is like the flatline EKG of a dead person for the last three years," Joan Lappin, chairman of Gramercy Capital Management, wrote in Forbes.com, calling for Chief Executive Richard Parson's resignation.

Lappin, whose firm no longer holds media stocks, was a longtime media analyst who has watched the company since the late 1960s, when it was just a magazine publisher.

The sentiment on Time Warner's stock, however, appears to be improving judging by activity in the stock options market.

There are already more than 200,000 outstanding calls that give holders the right to buy Time Warner shares at $17.50 and $20 by mid-January 2007. The stock closed at $16.27 on Wednesday on the New York Stock Exchange.

"The high open interest is a sign that players have been positioning in these options, and placing relatively cheap bets that Time Warner will rise between now and the end of the year," said Frederic Ruffy, an analyst at Optionetics, a California-based options education firm.

Haverty said he hopes the stock gets a 10 to 15 percent boost when the dust settles.

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