AMD said near $5.5 bln deal to buy ATI

PHILADELPHIA (Reuters) - Advanced Micro Devices Inc. (AMD.N), the No. 2 supplier of computer processors, is close to a deal to buy graphics chip maker ATI Technologies Inc. (ATYT.O) (ATY.TO) for $5.5 billion, a source familiar with the situation said on Friday.

Such a deal would shake up the processor industry, which is witnessing a tooth-and-nail fight for market share between AMD and larger rival Intel Corp. (INTC.O). AMD would gain one of two major graphics chips makers, the other being Nvidia Corp.(NVDA.O).

Markham, Ontario-based ATI is also a big supplier of chipsets -- the cluster of secondary chips and interfaces that surround a computer's processor -- for AMD and Intel products.

Unless talks break down, a deal could be announced as early as Monday, the source said.

ATI and AMD both declined to comment.

Since rumors of a deal first emerged in May, many industry analysts have voiced skepticism, saying it made little financial or strategic sense for AMD to buy ATI outright.

One concern is that the price would be too high for AMD, which already plans to spend $5 billion on capacity in the next few years, even as it fights a bruising price war with Intel.

"It would be a very dilutive acquisition and they don't want to spend their cash because they are going to need that for capital expenditures going forward," said one analyst at a U.S. research firm, who declined to be identified.

Graphics chips are also less profitable than PC processors. Gross margins in the business are about 45 percent, compared to 55 percent for main processors.

A tie-up with ATI could raise concerns that AMD would shun Nvidia, and potentially clash with a new AMD initiative called "Torrenza" that will open up its technology so other chipmakers can make their products work better with it.

Shares of ATI rallied on Friday on belief that a deal was close at hand. After gaining 83 cents, or 5.3 percent, to close at $16.56 on Nasdaq in regular trade, they jumped another 7 percent to $17.68 in after-hours trading. On the Toronto Stock Exchange, ATI finished 99 Canadian cents higher at C$18.77.

Rumors that Sunnyvale, California-based AMD could buy the Canadian chip maker surfaced in late May when an analyst suggested the move could make AMD more competitive with Intel.

But AMD shares finished down 15.7 percent at $18.26 on the New York Stock Exchange as investors worried that the company would not be able to continue taking market share from Intel.

Others wondered why ATI speculation received no attention from analysts on AMD's earnings conference call on Thursday.

"The most surprising thing with these results is the fact there was not even a question about ATI on AMD's call," Scotia Capital analyst Devan Moodley wrote in a research note.

(Additional reporting by Scott Hillis in San Francisco and Wojtek Dabrowski in Toronto)