- Jun 14, 2003
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reuters
?NVIDIA's big win?
24 Jul 2006
NVIDIA emerges as a big winner from the merger of AMD and ATI.
Advanced Micro Devices Inc.'s (AMD) acquisition of ATI Technologies Inc. (ATYT) has resulted in a big win - for ATI rival NVIDIA Corp. (NVDA). NVIDIA shares were up over 7 percent in heavy trading on Monday morning. With ATI tied to AMD's plans, it looks like NVIDIA has lost a competitor.
First, consider what the deal means for AMD, the world's No. 2 supplier of computer processors. Its battle with bigger foe Intel Corp. (INTC) has been much ballyhooed lately, and we've commented on it in the past. The gist of our argument has been that Intel's margins are so much wider than AMD's that AMD's historical price advantage has basically been at Intel's discretion. Now that Intel is addressing the threat, AMD's processors have become relatively more expensive than they were compared with those of its rival.
But if business history has taught us anything it's that competing purely on price is a great way to the poorhouse. Indeed, Intel's profit margin in its second quarter ended June, 11.0 percent, was half that of the year-ago period, 22.1 percent. AMD's profit margins are thin enough ? 7.3 percent as of its June quarter ? that competing by price cutting just isn't in its cards.
Instead, this deal seems to mark a strategic change to competing on the basis of technological advantage, with AMD matching its central processing unit (CPU) know-how with ATI's graphic processing unit (GPU) expertise. Presumably, future products will have integration between the two, permitting complete systems that will run more efficiently.
Intel must be breathing a sigh of relief. It will enjoy wider margins on a healthy top line if AMD competes only on technological prowess for a relatively niche audience and leaves Intel to its distribution agreements with Dell Inc. (DELL) and Hewlett-Packard Co. (HPQ).
The market's reaction on Monday morning, then, is to be expected: ATI up substantially, reflecting the premium that AMD is willing to pay for the shares; AMD down substantially, reflecting dilution, new debt and the $2.5 billion in cash paid for the deal; and Intel shares up slightly reflecting an improved competitive situation. What may surprise is NVIDIA's 7-percent-plus price gain.
Of course, there's probably some speculation that Intel will make a bid for NVIDIA. We don't consider this to be likely. Intel gains little against AMD with NVIDIA that a technology-sharing agreement wouldn't provide, and NVIDIA has no particular need to sell out, as we'll soon see. Even so, speculatively, Intel could make an acquisition of this size, as it had $6.4 billion in cash at the end of July to NVIDIA's $6.8 billion market cap.
But NVIDIA and ATI were bitter rivals in graphic processor units (GPUs), the core of 3D video hardware in both PCs and video game consoles. NVIDIA's GPU division accounts for 66.4 percent of revenues and 127 percent of operating income - its handheld GPU and "other" divisions lose money. It is also worth considering that both companies - and Intel and AMD, for that matter - are in the PC motherboard market. To this point, excepting Intel and AMD, all motherboard manufacturers have product lines that are geared toward one or the other CPU core. In NVIDIA's case, its motherboard division accounted for 3.0 percent of operating income on 17.4 percent of consolidated sales.
Let's back up a moment, and think about AMD's strategy again: If its ultimate goal is to wrest market share from Intel, what good does it do for it to actively impair NVIDIA products from working with AMD CPUs? There is no benefit; indeed, such a strategy would be self-defeating.
With the announcement, then, one of NVIDIA's primary competitors in the Intel-based motherboard space has effectively gone out of business. Brian Piccioni, of BMO Capital Markets, said in a note published that "it seems likely that (NVIDIA) will, within 12 to 18 months, have the highly profitable high-end discrete GPU market all to itself."
We can reasonably expect some margin improvement company-wide as well - after all, there's no need to market against a non-existent foe. Piccioni put it best: "While it may not be immediately evident, this transaction may the best thing to happen to NVIDIA in a long time."
?NVIDIA's big win?
24 Jul 2006
NVIDIA emerges as a big winner from the merger of AMD and ATI.
Advanced Micro Devices Inc.'s (AMD) acquisition of ATI Technologies Inc. (ATYT) has resulted in a big win - for ATI rival NVIDIA Corp. (NVDA). NVIDIA shares were up over 7 percent in heavy trading on Monday morning. With ATI tied to AMD's plans, it looks like NVIDIA has lost a competitor.
First, consider what the deal means for AMD, the world's No. 2 supplier of computer processors. Its battle with bigger foe Intel Corp. (INTC) has been much ballyhooed lately, and we've commented on it in the past. The gist of our argument has been that Intel's margins are so much wider than AMD's that AMD's historical price advantage has basically been at Intel's discretion. Now that Intel is addressing the threat, AMD's processors have become relatively more expensive than they were compared with those of its rival.
But if business history has taught us anything it's that competing purely on price is a great way to the poorhouse. Indeed, Intel's profit margin in its second quarter ended June, 11.0 percent, was half that of the year-ago period, 22.1 percent. AMD's profit margins are thin enough ? 7.3 percent as of its June quarter ? that competing by price cutting just isn't in its cards.
Instead, this deal seems to mark a strategic change to competing on the basis of technological advantage, with AMD matching its central processing unit (CPU) know-how with ATI's graphic processing unit (GPU) expertise. Presumably, future products will have integration between the two, permitting complete systems that will run more efficiently.
Intel must be breathing a sigh of relief. It will enjoy wider margins on a healthy top line if AMD competes only on technological prowess for a relatively niche audience and leaves Intel to its distribution agreements with Dell Inc. (DELL) and Hewlett-Packard Co. (HPQ).
The market's reaction on Monday morning, then, is to be expected: ATI up substantially, reflecting the premium that AMD is willing to pay for the shares; AMD down substantially, reflecting dilution, new debt and the $2.5 billion in cash paid for the deal; and Intel shares up slightly reflecting an improved competitive situation. What may surprise is NVIDIA's 7-percent-plus price gain.
Of course, there's probably some speculation that Intel will make a bid for NVIDIA. We don't consider this to be likely. Intel gains little against AMD with NVIDIA that a technology-sharing agreement wouldn't provide, and NVIDIA has no particular need to sell out, as we'll soon see. Even so, speculatively, Intel could make an acquisition of this size, as it had $6.4 billion in cash at the end of July to NVIDIA's $6.8 billion market cap.
But NVIDIA and ATI were bitter rivals in graphic processor units (GPUs), the core of 3D video hardware in both PCs and video game consoles. NVIDIA's GPU division accounts for 66.4 percent of revenues and 127 percent of operating income - its handheld GPU and "other" divisions lose money. It is also worth considering that both companies - and Intel and AMD, for that matter - are in the PC motherboard market. To this point, excepting Intel and AMD, all motherboard manufacturers have product lines that are geared toward one or the other CPU core. In NVIDIA's case, its motherboard division accounted for 3.0 percent of operating income on 17.4 percent of consolidated sales.
Let's back up a moment, and think about AMD's strategy again: If its ultimate goal is to wrest market share from Intel, what good does it do for it to actively impair NVIDIA products from working with AMD CPUs? There is no benefit; indeed, such a strategy would be self-defeating.
With the announcement, then, one of NVIDIA's primary competitors in the Intel-based motherboard space has effectively gone out of business. Brian Piccioni, of BMO Capital Markets, said in a note published that "it seems likely that (NVIDIA) will, within 12 to 18 months, have the highly profitable high-end discrete GPU market all to itself."
We can reasonably expect some margin improvement company-wide as well - after all, there's no need to market against a non-existent foe. Piccioni put it best: "While it may not be immediately evident, this transaction may the best thing to happen to NVIDIA in a long time."