ATI, which makes chipsets and graphics chips for PCs, also makes a host of semiconductors for consumer products, such high definition TVs and cellphones. The new offerings would broaden AMD's package of products as it takes on Intel (INTC), the world's biggest chipmaker that has long supplied a wider portfolio. In addition to supplying microprocessors, Intel sells so-called chipsets, which connect a microprocessor to a PC's other core components, and graphics chips, which power images rendered by computer games and internet video. Under terms approved unanimously by both companies' boards of directors, AMD will pay $4.2 billion in cash and 57 million in AMD shares to acquire all of ATI's outstanding stock, according to a news release. Based on AMD's closing share price of $18.21 on Friday, the deal valued ATI's shares at $20.47, a premium of almost 24% compared with ATI's Friday's closing price of $16.56 on the Nasdaq. AMD, which has been shelling out billions to add factory capacity so it can better compete with Intel, will pay for the acquisition with the help of a $2.5 billion loan from Morgan Stanley. AMD expects the deal to contribute "slightly" to earnings next year and add "meaningfully" to profit by 2008. The purchase will save the combined company about $75 million by the end of 2007. An acquisition of ATI "would make AMD a bigger player with a more diversified portfolio," said Nathan Brookwood, an analyst with research firm Insight 64. It "would certainly put AMD on a more equal footing relative to Intel." The deal also put competitive pressure on Nvidia (NVDA), the other dominant maker of graphics chips. Nvidia has competed against Intel in selling chipsets and graphics chips while counting on AMD for sales of those products.

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