Advanced Micro Devices and Monolithic Memories, two pioneer computer chip companies in Silicon Valley, on Thursday announced an agreement to merge that will create the world's largest company that makes nothing but integrated circuits.
The stock-swap merger, valued at $422 million based on Thursday's closing price of AMD's stock, is part of a shift toward bigger companies in the traditionally entrepreneurial industry, where corporate histories often start in someone's garage.
The merger also unites two of the semiconductor industry's most colorful and well-known personalities: W. J. "Jerry" Sanders III, head of AMD, and Irwin Federman, chief of Monolithic Memories.
Calling the combination of the two companies "a milestone in our history," Sanders told employees in a memo that the merger "exemplifies the recognition of a new era in our industry where size and financial muscle are on an equal footing with entrepreneurship and innovation as the basis for sustained, profitable growth."
Federman, who will become vice chairman of AMD, said in a statement: "The similar cultures of our two great companies, based on respect for the individual and a resultant commitment to people, makes this a logical combination of forces."
Under the agreement in principle, each of Monolithic Memories' 21.8 million shares will be converted into seven-eighths of a share of AMD stock. The merger, which must be approved by shareholders and government regulators, is expected to be completed in three or four months, the two companies said.
The merger will create a company with $1 billion in projected sales, 17,000 employees and a cash hoard of $300 million. Monolithic Memories will be operated as a subsidiary of AMD, the nation's fifth-largest manufacturer of integrated circuits, a type of semiconductor.
After the merger, AMD will be the world's largest exclusive manufacturer of integrated circuits, the two companies said. Other, larger companies make integrated circuits, but they have more diverse product lines than AMD.
The stock of Sunnyvale-based AMD slipped 87 1/2 cents on the New York Stock Exchange to close at $22.12 1/2. Monolithic Memories of Santa Clara saw its stock jump $3.12 1/2 a share to close at $17.62 1/2 in over-the-counter trading.
Analysts generally applauded the merger, although some questions apparently remain, reflected by the decline in AMD's stock price.
The merger and the fledgling rebound of the semiconductor industry should boost the fortunes of struggling AMD, which posted a $95.9-million loss on sales of $632 million for the year ended March 31, said Paul Johnson, an analyst with L. F. Rothschild, Unterberg, Towbin in New York. The two companies have complementary product lines and strong management teams, he said.
"It solves some of their problems," Johnson said. "It makes them a bigger company, which in this industry seems to be good . . . . It used to be that the (U.S. semiconductor) companies competed against each other, and now the competition is Japan and the Japanese are huge."
The merger adds financial resources and market strength, said Gene Norrett, vice president of Dataquest, a San Jose-based high-technology market research firm.
"There will be a tremendous synergy between the two companies in terms of their product lines," he said. But the similarity of the two companies' product lines is also a drawback to the merger, said Adam F. Cuhney, a San Francisco-based analyst with the New York investment firm of Kidder, Peabody & Co.
While AMD will gain market share in a type of semiconductor called PAL, or programmable array logic circuit, the processing technology used by most of those circuits produced by the two companies is the older bipolar technology rather than the newer and increasingly popular CMOS or complementary metal-oxide semiconductor technology, which is the leading edge of semiconductor technology, Cuhney said.
"What they're bringing to each other is (similar) technology," he said. Without the CMOS products, which AMD and Monolithic Memories have been unable to produce in large quantities, "you are becoming technologically obsolete, and that's the basic issue which stands before both companies," Cuhney said.
ADVANCED MICRO DEVICES AT A GLANCE A major maker of semiconductors for computers, AMD began as an altrnative supplier of circuits developed by others but has shifted toward its own designs. 1986 results slipped due to an industrywide slump.
Year ended March 31: (in millions) 1986 1985 1984 Revenue $576 $931 $583 Net income (loss) (37) 135 71
Assets: $239.6 million Employees: 13,500 Shares outstanding: 56 million 52-week price range: $31.50-$12.875 Thursday's close (NYSE): $22.125
MONOLITHIC MEMORIES AT A GLANCE A top producer of large-scale integrated circuits, the company has suffered during the recent semiconductor recession, although results rebounded sharply in the quarter ended March 15.
Year ended Sept. 30: (in millions) 1986 1985 1984 Revenue $205 $178 $187 Net income 8.9 10.5 26.9
Assets: $170 million Employees: 4,200 Shares outstanding: 21.4 million 52-week price range: $21.875-$10 Thursday's close (OTC): $17.625