Very positive WSJ article on S3
June 23, 1999
Tech Center
S3 Agrees to Buy Diamond Multimedia
In a Stock Deal Valued at $160 Million
By DEAN TAKAHASHI
Staff Reporter of THE WALL STREET JOURNAL
SANTA CLARA, Calif. -- Positioning itself against rivals, graphics-chip maker S3 Inc. agreed to pay $160 million in stock to acquire Diamond Multimedia Systems Inc., a graphics-circuit-board company that also makes the hot-selling Rio MP3 music player.
S3, which is based here, said it would issue 0.52 share for each of the 35.3 million shares held by Diamond investors. The deal, combining a chip maker and board maker, mimics similar combinations at rivals like 3Dfx Interactive Inc., ATI Technologies Inc. and Matrox Inc. Diamond is based in San Jose, Calif.
Instead of selling chips to board makers, S3 can
now sell boards with its chips directly to
computer makers and retailers. Meanwhile, the
deals have left Creative Technology Ltd.'s
Creative Labs unit as the major independent board maker in the graphics
business.
S3's stock fell 68.75 cents, or 7.3%, to $8.75 in Nasdaq Stock Market trading Tuesday. Diamond's shares slid 93.75 cents, or 17%, to $4.75, also on Nasdaq. S3's stock had been on the upswing since it disclosed last week that its shares in a chip-factory joint venture would be converted into 252 million shares of United Microelectronics Corp. stock, currently valued at about $660 million. (up 160 million from the announcement)
Ken Potashner, chief executive officer of S3, said the Diamond deal
accomplishes several goals. It ensures that S3 will be able to compete for customers who want to deal with an established board maker rather than a chip vendor. It also helps S3 launch its products more quickly because it will automatically have a board customer. And it helps S3 diversify into two hot markets: information appliances and home-networking devices.
S3 was once the top graphics chip maker, but it lost that title in the past year to ATI because of various missteps with its 3-D graphics chip development. In the past six months, Mr. Potashner arrived as CEO and S3's Savage line of products has been regaining market share. S3 reported a loss of $15.6 million, or 27 cents a diluted share for the first quarter, and is expected to lose money until the fourth quarter.
"This is the way to go in graphics these days," said Arnab Chanda, an analyst at BancBoston Robertson Stephens in San Francisco. "This leaves S3 with several good options for selling their chips to computer makers."
About 60% to 70% of Diamond's business is in 3-D graphics add-in boards for personal computers. But the company's fastest-growing businesses are its home networking devices, which connect computers wirelessly or via phone lines, and the Rio music player, which can be used to play back music that has been downloaded from the Internet. The Rio, which has sold more than 200,000 units in the past year, is one of the first information appliances that is expected to gain favor with consumers hungry for Internet applications.
Mr. Potashner said he would prefer not to shake up Diamond's relations with its current chip vendors, including Nvidia Inc., a Santa Clara company that supplies chips for about a third of Diamond's 3-D graphics boards. Nvidia lost a major customer in December when 3Dfx, also based in San Jose, acquired board maker STB Systems Inc., Austin, Texas, for $140 million.
William Schroeder, CEO of Diamond, will become chief operating officer of S3. |
