AMD is getting really close to buying Canadian graphics chip maker ATI Technologies Inc. for $5.5 billion. This is another step that AMD is trying to take to get a strong foothold in not only the semiconductors market, but also in the graphics-chip as well; making Nvidia Corp. their new big-time competitor, as it already competes head-to-head with Intel Corp. If all goes well, AMD and ATI could announce the deal as early as this morning.
But get this, my feeling towards the deal isn't that great. If the deal does indeed go through, we can all pretty much expect a decline in AMD's "already" low share prices. A reaction that the market will probably take considering that the deal makes little financial or strategic sense. Analysts on Wallstreet already agree after several have already expressed concerns when the rumour broke out late Friday of last week.
One major worry would be the pricing issue. Can AMD afford to spend the cash on this type of expansion? Intel is already breathing down their backs, and one small wrong move could get AMD breathing in the dust as Intel runs ahead. Also, with Nvidia knocking on the door...well that just gets scary.
Putting the cash issues behind, let's take a closer look at the graphics chips market. Graphics chips aren't very profitable! (and neither are PC processors for that matter). Gross margins in the graphics business are about 45%, compared to 55% for main processors. This would probably drag down AMD's focused performance, something that could eventually hit their bottom-line.
I've seen something like this before. Does Hewlett Packard and Compaq sound familiar? or what about Symantec and Veritas? Trust me, they both ended up very ugly.