Chip Maker AMD to Buy Nexgen for $857 Million

Advanced Micro Devices Inc. said it will buy Nexgen Inc. for about $857 million in stock, in an effort to keep pace in the computer chip industry with market leader Intel Corp.

Nexgen shareholders will receive 0.8 share of AMD for each common share they hold. The boards of both companies have already approved the transactions, and so have holders of 37% of Nexgen shares, the companies said. Those holders include Compaq Computer Corp., Italy’s Olivetti Group and Japan’s ASCII Corp.

In making the acquisition, AMD is admitting it couldn’t develop a microprocessor that could compete against the Pentium by Intel, which is expected to ship 40 million units this year, analysts said. Nexgen, based in Milpitas, Calif., is already shipping a Pentium-class product and earlier this month announced the design for the next generation of chips beyond Pentium-class.

“We never felt that we could compete against Intel alone,” said W.J Sanders, chairman of AMD. “This enhances our overall ability to compete. What the customers want is a credible alternative.”

Sunnyvale-based AMD is suffering as Intel, the leading chip maker in the world, aggressively cuts prices for its Pentium chips, which are quickly replacing the 486 chips that AMD relies on for about 33% of its revenue.

AMD was counting on its next-generation Pentium-class chip, code-named the K5, to help it bounce back next year. The introduction of the K5, however, was delayed from the fourth quarter until the second quarter of next year, which will hurt earnings until the second half of 1996.

Analysts have said that AMD has had problems with the design of the K5 and had to redesign parts of it. For several years, AMD has relied on sales of chips that copied the design of Intel’s 486 family of processors.

With the introduction of its Pentium processor, however, Intel stopped licensing the design, and clone makers were forced to develop their own chips.

AMD reported last week that third-quarter net income fell to $56.2 million, or 52 cents a share, from $86.7 million, or 86 cents a share, in the year-ago quarter. The results were below analysts’ lowest estimates, as prices for the company’s 486 processors have tumbled faster than expected.

Sales rose 9%, to $590.4 million from $543.1 million.