ATI acquires ArtX in graphics merger

ATI acquires ArtX in graphics merger
SAN MATEO, Calif.—ATI Technologies Inc. (Toronto), the leading supplier of graphics chips for personal computers, has agreed to acquire ArtX Inc. (Palo Alto, Calif.), a designer of graphics chips for the consumer market. The purchase price is approximately $400 million in ATI stock and options.

ArtX is the supplier of graphics technology for Nintendo's next-generation game console, code-named Dolphin. ArtX more recently started working with Acer Laboratories to deliver a core logic chip set that integrates a graphics controller for the Socket 7 PC marketplace.

The acquisition helps ATI prepare for fast changes in its core PC graphics market while it cements its growing position in the consumer graphics world, said Jon Peddie, president of graphics watcher Jon Peddie Associates (Mill Valley, Calif.) Specifically, ArtX will provide ATI a much-needed integrated graphics/core logic chip for low end PCs as well as access to a stellar design win in Nintendo's Dolphin, he said.

ATI announced an integrated graphics chip for PC last year but failed to deliver it, Peddie said. ArtX will help the company recover by providing a part it now has in first silicon. The ArtX part includes a graphics core that supports the high-end geometry processing functions of transform and lighting, which could distinguish the part from growing competition from Intel, Via Technologies and others. The ArtX integrated graphics part can work with either SDRAM or double-data-rate parts, giving it a possible home across a range of low- to high-end desktops, he added.

While ATI is the biggest PC graphics company with about 38 percent of the market, that market is quickly moving to integrated parts for PCs facing stiff price pressures. Peddie estimates integrated graphics will make up 60 percent of the graphics market for "value PCs" by the end of the year and as much as 35 percent of the overall PC graphics market by the end of 2001. "Integrated graphics is definitely where everything is going as PCs come down in price," Peddie said.

Underlining that trend, Intel formally announced its Timna processor this week, a Pentium III class CPU with graphics and a memory controller on board. The part will ship in the second half of the year, Intel said.

In the consumer realm, ATI has gained high profile design wins from General Instrument and more recently Sony for a set-top box graphics part. But the link with ArtX gives ATI access to the even higher-profile Dolphin project. Under Dolphin, IBM is providing a version of its PowerPC with graphics from ArtX as the core of the follow up to the Nintendo-64 platform, slated to ship next year.

With a firm position in both consumer and PC graphics, ATI is set to pull away from an industry known for fragmentation and rapid design changes where one year's top company can be struggling to survive a year later.

"ATI also gains a premier design team in Silicon Valley which is no small feat these days," said Peddie. The ArtX designers include former engineers from Silicon Graphics Inc and MIPS Technologies who helped design the Nintendo 64 console.

For ArtX, the $400 million acquisition is a "good payoff for a small engineering company with no sales," Peddie said.

All of ArtX's 70 employees are expected to join ATI while remaining in Palo Alto, according to Tim Van Hook, co-founder and chief technical officer.

"It's a really good fit. We talk to a lot of the same customers and OEMs, so now we can do it jointly." Joining ATI will also give ArtX the operational infrastructure it hasn't had time to develop since its founding in 1997, including sales and marketing and support functions, he added.

Dave Orton, president and CEO of ArtX, will take the newly-created titles of president and chief operating officer of ATI. Wei Yen, co-founder and chairman of ArtX, will join ATI's board of directors.

The acquisition, subject to customary regulatory approvals including Hart-Scott-Rodino notification, is expected to close in about a month. ATI will acquire all of the outstanding common shares and options of ArtX for 24.6 million common shares and 8 million options of ATI. The deal is expected to be slightly accretive to ATI in earnings per share in fiscal 2001 and accretive to the company by about 10 to 15 cents for fiscal 2002.