The battle for supremacy in the chip-making market has reached a critical phase with Advanced Micro Devices (AMD) announcing its plan to acquire Canadian graphic cards manufacturer ATI Technologies (ATI).

The imminent $5.4 billion purchase of ATI, analysts say, is the most vital element in AMD's concerted campaign to dethrone the mighty Intel. The acquisition, which is subject to shareholder and regulatory approvals, would turn AMD into one of the world's largest providers of graphics chips.

"You won't see it tomorrow, but the merger will potentially put AMD on a more equal footing with Intel," said Michelle Warren, an analyst with Evans Research.

Growth spurt

Warren noted that AMD is positioned for aggressive growth. "As Intel is the market leader, it's their natural target."

For AMD, the acquisition would round out its graphics processing unit portfolio, said Eddie Chan, lead analyst, mobile and personal computing at research firm IDC. ATI, he said, also blends in well AMD's LIVE! convergence platform. "ATI has a strong product portfolio that covers components for such offerings as mobile phones, wireless products, digital TV, and high-definition TV."

On the flip side, AMD allows ATI to hitch a ride on the integrated chip bandwagon.

Integrated thinking

Discrete graphics components have been suffering over the years as the market moves on to integrated chips such as those sold by Intel, the IDC analyst said. "A tie-up with AMD allows ATI to move towards integrated solutions or the so-called system-on-a-chip platform."

The marketing message from ATI executives too is all about the "mutual benefits" of the proposed acquisition. Adrian Hartog, senior vice-president for consumer products at ATI, characterised the alliance as a growth opportunity for both companies.

R&D lead

It is generally expected that the merged company will harness ATI's strong R&D (research and development) track record. In a list of Canada's top ten R&D spenders released late last year, ATI Technologies was at number five.

The list was released by Toronto consulting firm Research Infosource. ATI spent $389.1 million in R&D in 2004, an increase of 18.3 per cent. The company's research team has a proven capacity to turn major new products out every 12 to 18 months.

"Bringing these two companies together will allow us to transcend what we have accomplished as individual businesses," said Hector Ruiz, chairman and chief executive officer (CEO) of AMD in a statement. "All of our product lines will benefit."

Earlier, AMD revealed plans to build a highly efficient dual-core notebook processor, set for release in the second half of 2007.

Servers and gamers

AMD enjoys considerable strength in the server and consumer computing industry while ATI is considered a leader in the computer gaming arena. Warren said recent years have seen these disparate markets move closer to each other.

For instance, ATI's Shader Model 3.0, which allows complex shading and more realistic image rendering, is finding traction in the enterprise space with companies that are heavy computer-aided design (CAD) users, including customers in the automotive, aerospace and animation spaces.

Hartog said the purchase of ATI by AMD will involve "some changes" but he downplayed any potential lay-offs from the company's more than 3,000 employees.

"Ontario has one of our largest R&D teams and that arrangement will continue. We are not anticipating any immediate lay-offs," Hartog said.

Any acquisition raises the issue of employment stability, said Warren, but AMD would be wise to allow ATI to continue operating as it does. "There is a strong chance ATI will be given a measure of autonomy because it has great strength in its area."

Warren said the alliance also "steps up" ATI's competition with rival nVidia. Apart from ATI, AMD also turns to nVidia for graphics components. "Depending on the contract, it is possible that nVidia's access to AMD chips will be limited."

If that happens, the Evans Research analyst said: "it will open the doors for nVidia to search for new options and possibly talk with Intel. However, Hartog said there will be no move to constrain nVidia's supply. "nVidia will continue to be AMD's partner".

Both ATI and AMD are committed to open platform systems," he said. "In fact that is what differentiates us to our partners and customers."