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Industry players rooting for Nvidia-AMD merger

Posted: 03 Mar 2008     Print Version  Bookmark and Share

Keywords:Nvidia GPU  AMD  merger speculations 

It would be the deal of the decade, although for some semiconductor industry observers, it borders on extreme speculation.

As opinion abounds about Advanced Micro Devices Inc.'s future, some analysts see it playing out this way: Nvidia Corp.'s Jen-Hsun Huang swoops in and sweeps aside regulatory hurdles, x86 licensing issues and howls of protest from customers and rival suitors, to rescue AMD and secure his company's future in the graphics processor market.

Huang, president, CEO and co-founder of Nvidia, isn't commenting and his company hasn't made public overtures to AMD. Yet, industry observers count Nvidia among the companies that could conceivably acquire AMD. Others include IBM—a technology partner of AMD, but a company that Sam Palmisano, chairman and CEO, has been steering away from technology hardware and toward software and services; Samsung Electronics; and a bunch of private equity firms.

Indian investors have also been mentioned as possible suitors.

Financing the transaction might be problematic in today's tight lending market, and the assumption of more than Rs.19,682.60 crore ($5 billion) in AMD debt could spark a shareholder revolt at Nvidia. Additionally, Nvidia would be taking on AMD's manufacturing problems and becoming a direct rival of Intel Corp., one of the industry's better-financed and toughest competitors.

Promising deal
Despite the long string of potential problems, analysts and industry observers insist that the idea of Nvidia purchasing AMD has significant merit. For one, the merger would help fill glaring holes in their respective operations and give the combined company a better chance of survival through the pooling of product and financial resources.

"If you look structurally at the industry, something has to give in terms of product positions at both Nvidia and AMD," said Doug Freedman, an analyst at American Technology Research. "The problems related to such a deal can be overcomed."

Several industry players in Silicon Valley are rooting for an Nvidia-AMD merger. George Haber, a serial entrepreneur in Silicon Valley who has served on the boards of Zoran and 3dfx, said the move "would be good for AMD shareholders" and would present "the most severe challenge" for Intel.

Haber said he arrived at that conclusion because he knows Huang personally, not because he has a financial interest in either company.

"Jen-Hsun [Huang], just like [Steve] Jobs, [Larry] Ellison, [John] Chambers and a few others, has an enormous passion and drive for what he does, and that passion or even obsession is the source of his success," he said. "[Successful CEOs] are like poets and artists that inspire, innovate and create... such passion is often replaced at many public companies by the financial greed of bureaucrats or smart MBAs with no real experience."

Nvidia did not respond to requests for comment, but in the past it has acknowledged the growing challenges it faces as AMD and Intel push for platform or integrated graphics solutions rather than the standalone, discrete graphics that account for the bulk of Nvidia's sales.

Nvidia's hurdle
"As Intel and AMD continue to pursue platform solutions, we may not be able to successfully compete and our business would be negatively impacted," Nvidia stated in a recent quarterly filing with the U.S. Securities and Exchange Commission.

Concern about Nvidia's ability to integrate the x86 processor into its graphics core is driving calls for the company to consider purchasing AMD. However, no one would even suggest such a transaction had AMD's stock price not fallen so sharply over the last year or so.

Nvidia, with Rs.15,746.08 crore ($4 billion) in annual revenue, is smaller than AMD, which in 2007 recorded revenue of Rs.23,619.11 crore ($6 billion). But Nvidia is considered a faster-growing company and has a market value about three times that of AMD. On Feb. 26, Nvidia's shares closed at Rs.885.72 ($22.50), giving it a market value of Rs.49,206.49 crore ($12.5 billion), compared with Rs.16,139.73 crore ($4.1 billion) for AMD on the same day.

"That theory gets floated typically when AMD's stock price is down," said an industry observer, who declined to be named. "How Nvidia might get access to x86 processor is the key issue. There are other ways for them to do this than by buying AMD."

AMD has its share of difficulties. Its acquisition of ATI was supposed to help it better compete with Intel, but ironically, it also strengthened Nvidia, increasing its market share and resulting in the double-digit revenue growth that boosted Nvidia's stock price.

AMD troubles
Struggling with integration issues, AMD-ATI saw its share of the discrete graphics IC market slip to 33 per cent in Q4 2007, from 45 per cent in the year-ago quarter, while Nvidia's share surged to 67 per cent, from 54 per cent, according to Mercury Research.

Had ATI remained an independent entity, it is possible that it would be mentioned today as a potential buyer for AMD. ATI was purchased for Rs.22,044.51 crore ($5.6 billion) in cash and stock in October 2006, but AMD's current market value is below that dollar amount.

With zero debt, almost Rs.7,873.04 crore ($2 billion) in cash at the end of its fiscal year on Jan. 27, and a loftier stock value, Nvidia could possibly finance the acquisition of AMD, although the transaction would greatly increase its debt-equity ratio. To close the deal, Nvidia would have to offer a hefty premium to AMD's stock price—possibly 50 per cent or more—and assume responsibility for AMD's Rs.19,682.60 crore ($5 billion) in long-term debt.

These may not be the only obstacles, however. The biggest hurdle Nvidia would have to scale is regulatory approval. Nvidia and AMD-ATI have a virtual lock on the discrete graphics IC market, according to Dean McCarron, president and principal analyst at Mercury Research. The two companies combined accounted for almost 100 per cent of the discrete graphics IC market in the fourth quarter. "The merger of Nvidia and AMD would mean the elimination of competition in the market," McCarron said. "It would essentially be a sanctioned monopoly."

Even if regulators were inclined to approve the transaction, equipment manufacturers and system integrators are guaranteed to raise an outcry. Competition between Nvidia and AMD-ATI has benefited customers in the form of technology innovation and price reductions.

Also, the emergence of a single-source supplier in the discrete graphics IC market could significantly hurt equipment vendors in the event of a manufacturing glitch at the new entity.

An AMD source also cited the x86 cross-licensing agreement the company has with Intel, an arrangement that could require extensive renegotiation if Nvidia were to purchase AMD.

Then there is the challenge of absorbing what would be the largest acquisition in Nvidia's history. While Nvidia has made small to midsize purchases in the past, the company has limited experience integrating a major rival and would have to resolve architectural platform issues not just with AMD but also with the old ATI.

More hiccups
Nvidia's fabless operating structure could also produce some hiccups. Totally dependent upon foundries for its wafer supplies, Nvidia has never had to manage a fab and could run into problems understanding the new business model.

"Nvidia is a fabless company, and I don't see how they are going to make that transition into a fab operator if they were to buy us," said the AMD source. "Nvidia buying AMD makes no sense."

He is not alone in that sentiment. In fact, other sources insist that Nvidia could, for now, continue to grow steadily in its core discrete graphics IC market, even as Intel and AMD-ATI chip away at the segment by offering integrated solutions.

Nvidia appears to have chosen this option, according to recent comments from Huang. Pressed by analysts during the company's latest quarterly conference call to explain how Nvidia will continue to compete as graphics integration becomes more pervasive, Huang said his company believes in "heterogeneous computing," whereby the GPU co-exists with the CPU.

"Billions and billions of dollars of R&D have gone into making that CPU as good as it can be? but they'll never scale very well from here on out," Huang said. "We believe that the world needs a heterogeneous computing model where the single-threaded, flexible CPU is combined with or collaborates with a massively parallel processor—in this particular case, the GPU."

There is some danger in that position, however. If Intel and AMD-ATI continue to expand their integrated offerings or even increase their presence in the discrete graphics market, Nvidia's share could dramatically shrink.

As Mercury Research's McCarron pointed out, the discrete graphics IC market is expected to remain strong and healthy for the foreseeable future because of its scalability and the options it offers system builders.

Integrated trumps discrete
Nevertheless, even McCarron conceded that integrated platform solutions are the wave of the future because they offer improved stability, energy efficiency and better time-to-market—all attributes that OEMs and PC system integrators need to improve their cost structure and increase profitability.

Intel is the clear leader in the overall graphics IC market (discrete and integrated chipsets), with a 42 per cent share at the end of Q4, followed by Nvidia with 34 per cent and AMD-ATI with 18 per cent. Although Intel has not reentered the discrete IC market, it might be moving in that direction and possesses the technology know-how and resources to easily grab market share from the current market leaders.

"AMD's Fusion will make it hard for Nvidia to sell chipsets with embedded graphics in the AMD space, and the discrete graphics space is declining," said Nathan Brookwood, a principal analyst at Insight64. "Intel is doing this, too."

If Intel starts to supply discrete ICs again, this would eliminate one of the fundamental challenges Nvidia could face if it wants to purchase AMD-ATI: regulatory concerns about a market monopoly.

In that case, Nvidia could conceivably proceed with plans to acquire AMD, but it would still have to deal with a host of other problems.

- With additional reporting by Rick Merritt and Junko Yoshida

- Bolaji Ojo
EE Times

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