AMD Hopes ATI Acquisition Will Juice Up Future Chips

Short-term competitive pressure from Intel, which recently overhauled its processor portfolio, may explain why Advanced Micro Devices pulled the trigger on its largest acquisition ever. But how well AMD can integrate ATI Technologies' offerings into its future processors will determine if AMD overpaid by shelling out $5.4 billion in mostly cash to buy the graphics chip specialist last week.

The acquisition is designed to enable AMD to expand in commercial desktop and mobile computing applications, two areas where it has seen the least market penetration.

The transition to smaller manufacturing process geometries about every two years provides chipmakers with increased "transistor budgets"--the ability to place more processing elements, such as the graphics capabilities of ATI, within a specific chip size. Most recently, that extra space was taken up by two processing cores within a single chip die. Later this year, Intel will shift to designs that have four cores in a single processor; AMD plans to introduce its first quad-core processor next year.

When AMD takes the next step from a 65-nanometer manufacturing process in 2007 to 45 nanometers in late 2008 or in 2009, it can consider a move to eight cores in a single chip. Or it may find greater value by integrating the graphics capabilities it purchased from ATI. "That would be a terrible time to find out you've got the available transistors but not the intellectual property," says Nathan Brookwood, an analyst with Insight 64. "Intel already has graphics capabilities. ATI is an insurance policy for AMD's long-term intellectual property requirements."

Hector Ruiz, chairman and chief executive of AMD, said during a teleconference that integration of technologies like ATI offers onto one chip is "inevitable but also advantageous."