Nvidia moved closer to claiming the computer graphic chipmaker throne, announcing on Friday the acquisition of 3dfx Interactive (Nasdaq: TDFX) for $112 million in cash and stock. It's the king for the time being, but there's no way to know for sure how long its reign will last The company's product portfolio has provided it with additional market and the Microsoft endorsement bodes well for its next line of chips. However, this sector hasn't treated its leaders fondly in the past.
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Not long ago, The Motley Fool's Brian Lund dubbed computer graphic chipmaker Nvidia (Nasdaq: NVDA) future king of the computer graphics industry. Upon the market's close Friday, the Santa Clara, California-based Nvidia moved closer toward claiming that throne, announcing the purchase of struggling competitor 3dfx's (Nasdaq: TDFX) graphic-related assets for $112 million in cash and stock. Nvidia will pay $70 million in cash and one million shares of common stock for 3dfx's graphic-related assets, which include patents, trademarks, brand names, and chip inventory. Layoffs for 3dfx's 550 employees will begin early next week. According to a ZDNet article, Nvidia will also loan 3dfx $15 million in working capital, which will be counted against the purchase. In addition, the two companies agreed to dismiss their patent lawsuits against each other. There's been plenty of bloodshed in the computer graphics hardware business over the last few years, in part the result of regular sea changes in technology that have provided several companies with 15 minutes of proverbial fame. The former Rule Breaker 3dfx once claimed top spot in this sector. A big reason for the company's demise was its decision to enter the board manufacturing business. By making its own graphic cards, rather than just the processing chip, the company entered a business with lower margins and higher capital expenditures requirements. This business model shift didn't work, and companies like Nvidia that stayed within their core competencies "chipped away" at existing market share. More troubles came for 3dfx last Friday when the company posted unimpressive third-quarter results, citing slow demand, pricing pressures, and the inability to secure a blank line of credit to build out inventory. 3dfx posted a loss (excluding charges) of $178.6 million, or $4.53 per share, compared to a loss of $17.6 million, or $0.73 per share, in the year-over-year period. Revenues decreased 63% from the year-ago period to $39.2 million. What next for Nvidia? Nvidia's own string of positive financial results is impressive considering the onslaught of poor results from competitors 3dfx and ATI Technologies (Nasdaq: ATYT). When Paul Larson recognized Nvidia as a Daily Double feature, he asked: Is its lead sustainable? That remains the biggest question, given the nature of this sector. In the graphic chip game, innovation occurs frequently and there are plenty of companies dumping dollars into research and design to come up with the next best graphic chips. Hence, Nvidia is the king for the time being, but there's no way to know for sure how long its reign will last. While some believe that the increasing complexity of 3D graphics has created additional barriers to entry that will curb competition, that hasn't been the case so far. For now, however, Nvidia's product portfolio has provided it with additional market share and the Microsoft endorsement bodes well for its next line of chips.
Nvidia has a cash balance near $700 million, helped by a $200 million advance payment from Microsoft (Nasdaq: MSFT) for providing the graphic and communications processors for the X-box video game console. (The Motley Fool examines the impact of the X-box in the video game software market in Industry Focus 2001.) Deferred revenues are a good liability because they have been collected before at least some of the services have been performed. On the cash side, therefore, they provide a great deal of upfront capital.
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