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AMD + ATI = True Love

Love is in the air today. Chipmakers ATI (Nasdaq: ATYT  ) and AMD (NYSE: AMD  ) held their engagement party this morning, announcing that the two will forge the ties that bind in the fourth quarter of this year. In a combined cash and stock deal, AMD will pay out $16.40 in cash, plus 0.2229 shares of its own stock, in exchange for each ATI share (assuming that Canadian and U.S. regulation bodies -- plus a majority of ATI shareholders -- approve of the union).

It's a long-anticipated merger, and it creates a company with the ability to provide every significant chip in an entire PC, something Intel (Nasdaq: INTC  ) has been doing for years. That includes the main processor from AMD and core logic chipset and graphics from ATI. Plus, it opens up the possibility of combining elements from each company's design philosophies into entirely new processing units.

In fact, that opportunity was stressed repeatedly in the conference call, where management went so far as to say that a paradigm shift is coming and that in 2008, AMD/ATI will change the way we think about the concept of processing. It's a bold claim, and I expect that it's somehow related to plugging modules with new capabilities into the Torrenza platform -- also known as Socket AM2. ATI has already proven that its chips can handle tasks such as advanced physics processing, in addition to the graphics crunching for which they were designed. Expanding that to other specialized fields would make a lot of sense and could indeed transform data processing -- much like the floating-point coprocessor did in the mid-90s.

The marriage leaves a couple of jilted partners by the wayside, and it will probably bring Intel and Nvidia (Nasdaq: NVDA  ) closer together. AMD will continue to support the entire ATI product line, including chipsets for Intel processors, although rumor has it that Intel will withdraw ATI's license to build them. If so, that would put AMD CEO Hector Ruiz' words in a new light, since he said that ATI provides a compelling platform for Intel and that he expects Intel to want what's best for the customer.

AMD is heading into a brave new world with this acquisition, one of high-growth cell phone and handheld computing graphics, high-margin entertainment set-top boxes, and (of course) high-revenue mainstream PC graphics. The focus on the entertainment opportunity makes AMD's recent divestiture of its Alchemy line of embedded processors all the more curious, but perhaps the company is planning to move its mobile architectures down into the embedded space. Then again, maybe ATI brings a surprise to the wedding. Here's a fistful of bird seed, and I wish the happy couple all the best.

You'll find Intel recommended in Inside Value and Nvidia recommended in Stock Advisor.A free trial will show you why these stocks are loved by our advisors and investors like you.

Fool contributorAnders Bylunddoesn't hold any position in any of the companies mentioned here. Foolishdisclosureis never dilutive to knowledge, so you can check outAnders' holdings for yourself.

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