October 20, 1995
By Charles Cooper and Tom Davey
The largest of Intel Corp.'s rivals is about to get an awful lot larger.
In a bold deal that caught analysts totally off guard, Advanced Micro Devices Inc. announced late Friday that it had signed a definitive agreement to acquire NexGen Inc. in an all-stock transaction. The deal is expected to close by the first quarter of next year.
The merger brings together two of the industry's key microprocessor manufacturers who have attempted, with varying degrees of success, to crack Intel's vise grip on the chip market.
The news was released following the market's close. AMD's shares closed 26 1/8, down 3/4 on Friday, while NexGen finished the day 21 1/4, down 3/8.
"It's definitely a radical move," said Michael Slater, publisher of the Microprocessor Report, a Sebastapol, Calif., newsletter. "But I think it has a good chance of working. AMD has a fab and needs things to build in. NexGen has chips but needs capacity."
Unlike AMD, NexGen does not own its own fabrication plant and depends on IBM Microelectronics to manufacture its Nx586 microprocessor. Meanwhile, AMD is awash in capacity. The company has invested about $300 million in the construction of the so-called Fab 25 in Austin, Texas, where it also operates three other plants.
"AMD must have felt like the K series parts were not going to fill their fab," Slater said.
Under terms of the deal, which the companies said is expected to be tax-free, NexGen stockholders will receive 0.8 shares of AMD stock for each share of NexGen they own. NexGen has about 41 million shares of stock outstanding.
Senior officials from NexGen and AMD were not immediately available for comment. In a prepared statement, however, AMD chairman and CEO W.J. Sanders said the union of the two companies "catapults us into contention for leadership in the market for fifth, sixth, and future generations of Microsoft Windows-compatible microprocessors."
Because of delays in its Pentium-compatible K5 chip, AMD, based in Sunnyvale, Calif., has been forced to rely on older 486 processors for the bulk of its revenues.
Meanwhile, Intel has cut prices on its Pentium line each quarter, making it all the more attractive for systems vendors to spurn the 486.
The upshot was a disappointing third quarter for AMD: The company's profits slipped 35 percent to $56.2 million from $86.6 million a year earlier. Company officials blamed the shortfall on declining prices in AMD's aging 486 product line. Sales increased 9 percent to $590.4 million from $543.1 million.
Last spring, AMD announced it had to delay deliveries of the K5, which had been expected in September, until the first quarter of 1996. Then last month, Sanders said AMD wouldn't be able to begin shipments until the second quarter.
Compounding AMD's problems, the company was forced to backtrack from earlier claims that the K5 would run about 30 percent than a comparable Pentium. Officials said that AMD wouldn't be ready with the faster K5 chips until the third quarter.
NexGen, which still remains the only other chip maker shipping Pentium-level processors, recently cautioned Wall Street that earnings would be short of expectations. Even though NexGen has been shipping its Nx586 line for some time, Intel's quarterly price reductions have taken their toll.
Indeed, NexGen officials warned late last month that Intel's price cuts had put "significant price pressure" its P90, the product line that constitutes the bulk of the company's sales.
The merger with AMD also raises other questions. NexGen's products aren't pin-compatible with industry-standard motherboards and it was not immediately clear whether the two companies plan to continue selling separate chip lines.
"[Pin compatibility] been a big problem for NexGen," said Prudential Securities analyst, Ashok Kumar.
Kumar suggested that AMD would offer a hybrid product that fuses the technologies of the two companies.
When it released the news this evening, AMD said it would stop the development of the "sixth-generation" processor that was slated to follow the K5.
"The question for AMD now is how long it will take them to address the market with a new product," Kumar said. "This announcement may be a signal that AMD's K5 architecture is in deeper trouble than they led people to believe."
AMD's planned purchase of the Milpitas, Calif., company may be rooted in a Oct. 10 technology disclosure in which NexGen showed off its latest CPU to analysts and industry cohorts.
At the Microprocessor Forum in San Jose, NexGen claimed that a prototype of its Nx686 processor shows big performance gains over rival Intel Corp.'s Pentium and Pentium Pro chips.
Analysts were impressed with NexGen's disclosure. Slater said the chip compares favorably with the Pentium Pro. Analysts also noted that NexGen's chip could sell for much less than the Pentium Pro.
Although NexGen has developed "first silicon," or a working prototype, of its Nx686 processor, the chip will not ship until the second half of next year, said Vinod Dham, NexGen's chief operating officer.
Dham, a former Intel executive, claims the chip will be 1.3 to 1.8 times faster at comparable clock speeds than the Pentium, which is considered the fastest X86 chip on the desktop. Dham said his chip was tested on several major benchmarks.
NexGen projected its chip, which will premier at 180MHz, will run 16-bit applications 1.3 to 1.5 times as fast as a Pentium of comparable clock speed.
The estimates, however, are extrapolations. Intel has not yet introduced a Pentium faster than 133MHz. But by late next year, it plans to have a Pentium around the 180MHz range.
With 32-bit applications, NexGen claims a performance enhancement of 1.4 to 1.8 times over the Pentium.
Compared with the Pentium Pro (formerly known as the P6), NexGen claims its product will shine most strongly while running 16-bit applications. The projected gain will be 1.7 to 2.0 times the Pentium Pro.
But on 32-bit applications, NexGen claims only a moderate performance hike over the Pentium Pro, ranging from roughly equal to about 1.3 times as fast.
Although NexGen claims to have more than 100 OEM systems customers for its current line of 5x86 chips, the only recognizable name among them is Compaq Computer Corp., which has an equity stake in NexGen and reportedly plans to begin using NexGen's chips this quarter.
Aside from speed, the Nx686 may have at least a short-term edge in other respects. It will come with built-in multimedia capabilities that are still lacking in both lines of Pentiums. The features should reduce the costs of multimedia enhancements in PCs and save space by eliminating cards from the motherboard.
But those advantages could be nullified as a raft of other companies are also announcing plans to consolidate numerous multimedia features in various inexpensive ways. Some of these companies will be launching products before the Nx686 begins shipping.
Another potential pitfall: NexGen's unique chip design strays from the Intel mold and thus requires special chip sets and motherboards that must be developed by third-party contractors. The company said it has solved the chip set problem by enabling the Nx686 to be compatible with chip sets designed by its current processor, the Nx586.
Still, industry observers say NexGen faces the challenge of convincing motherboard makers that the chip will have a broad enough market to make it profitable for them to build boards for the chip.
NexGen is currently manufacturing two versions of its Nx586 chip, the P 100 and P 90. It has also discontinued making but is still shipping a P80 and P75.
The chips are supposed to be comparable to Pentium chips of the same designation. But critics have countered that the NexGen chips lack a floating-point unit, which is critical in data intensive applications such as 3-D renderings.
NexGen said its Nx686 will be equipped with a floating-point processor.
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JF