Computer graphics chip maker ATI Technologies Inc. has embraced a $5.4-billion US cash-and-stock takeover offer from Advanced Micro Devices.

Sunnyvale, Calif.-based AMD, the second-largest computer chip maker in the world, is offering $4.2 billion US in cash as well as 57 million of its shares to buy Markham, Ont.-based ATI.

Based on the July 21 closing price of AMD common stock of $18.26 US a share, the consideration for each outstanding share of ATI common stock would be $20.47 US, including $16.40 US in cash and 0.2229 shares of AMD common stock.

"This combination means accelerated growth for ATI, and broader horizons for our employees," said Dave Orton, the president and CEO of ATI.

"All of our product lines will benefit. Joining with AMD will enable us to innovate aggressively on the PC platform, and continue to invest significantly in our consumer business to stay in front of our markets," he said in a statement.

The acquisition would broaden AMD's product range as it tries to compete against global chip leader Intel Corp.

The transaction is expected to be completed in the fourth quarter of 2006. In the event that the transaction does not close, ATI has agreed to pay AMD a termination fee of $162 million US under certain conditions.

AMD expects that the transaction will contribute slightly to 2007's earnings and will have a meaningful impact in 2008. The company expects it will reduce operating expenses for the combined company by approximately $75 million by the end of 2007.