Advanced Micro Devices Inc. acknowledged Wednesday it overpaid in its $5.6-billion US acquisition of Canadian graphics chip maker ATI Technologies Inc., adding to the deepening financial woes of the slumping semiconductor company.
Sunnyvale, Calif.-based AMD, the world's No. 2 maker of microprocessors behind Intel Corp., said in a filing with the U.S. Securities and Exchange Commission it will have to write down the value of the goodwill estimate it attached to Markham, Ont.-based ATI when it bought the company in October, 2006.
AMD said it does not currently know how big the charge will be.
Goodwill refers to the value of intangible assets such as a company's reputation or influence within an industry, or even employee morale, all of which are believed to influence its ability to drive future sales.
AMD's final purchase price for ATI included a $3.2-billionallocation for goodwill, nearly three times the value of product technology that ATI had already developed and was working on in its laboratories, according to AMD's regulatory filings.
AMD bought ATI to bolster the graphics capabilities of its chips and add valuable "chipset" technologies to its product lineup. Chipsets are responsible for sending data from the microprocessor to the rest of the computer.
AMD, until that point, focused primarily on microprocessors, which are the brains of computers.
Analysts immediately questioned the wisdom of the deal, however, expressing worries aboutAMD's ability to pay down the billions of dollars in debt it incurred to finance the transaction, and whether ATI's technologies would add enough value to AMD to justify the price.
AMD, which was riding high off several years of impressive market-share gains at Intel's expense, suddenly fell on hard times in the summer of 2006 when Intel struck back with a new product lineup.
AMD's finances were hurt by a fierce price battle and slumping demand for its chips, and its deep losses and gloomy outlook forced the company to go to Wall Street earlier this year to help pay down its oppressive debt.
The company offered up two rounds of convertible senior notes to investors, raising $3.65 billion from the debt offerings in April and August. AMD said the proceeds would be used to pay down debt from the ATI acquisition and fund general corporate expenses.
Other questions still linger about the ATI deal. One month after the deal was completed, AMD and Nvidia Corp. — ATI's chief rival in the graphics chip business— disclosed that they had received Justice Department subpoenas in a criminal investigation of possible antitrust violations in the graphics
Little is known about the probe, except that the subpoenas came on the heels of a lengthy Justice Department price-fixing probe of memory chip makers that led to charges against more than a dozen executives and hundreds of millions of dollars in fines.
AMD has lost $1.6 billion US through September, though sales continue to pick up. Analysts will be looking for more details about the company's financial outlook when AMD holds its financial analyst day Thursday in New York.
AMD's stock price has fallen by 54 per cent since the start of the year in a plunge that has wiped out more than $5 billionin shareholder wealth. Shares fell 10 centsto close at $8.97in Wednesday trading.