December 15, 2000 3:10 PM PST

Nvidia buys out 3dfx graphics chip business

Graphics chipmaker Nvidia bought out one-time rival 3dfx Interactive on Friday, another landmark in the consolidation of the graphics hardware industry.

Under the terms of the agreement, Nvidia will give 3dfx $70 million in cash and 1 million shares of common stock for the patents, brand names, and current inventory relating to 3dfx's graphics chip business. In addition, a patent infringement suit between the two companies will be dismissed when the transaction is closed. Nvidia will not acquire 3dfx's graphics board business.

Nvidia's purchase of 3dfx is the latest in a series of convulsions in the extremely competitive and often unprofitable graphics hardware business.

Five years ago, more than 20 companies designed graphics chips for PCs and workstations. Because of low margins and short product life cycles, only a handful remain.

A spate of acquisitions took place in March and April 2000. Ironically, through this acquisition, Nvidia acquired the assets of Gigapixel. Nvidia beat out Gigapixel in a contract to supply graphics chips for Microsoft's Xbox earlier this year. Subsequently, Gigapixel sold out to 3dfx.

3dfx was a favorite company of gamers in the mid-1990s, but the company then delayed a few products and received tepid reviews for others, crimping sales. In recent years, the company changed CEOs and began laying off employees.

"I'm sad that 3dfx is exiting the business," said MicroDesign Resources analyst Peter Glaskowsky. "3dfx did a lot of good work over the years, but unfortunately they didn't keep up with the good work Nvidia was doing."

Nvidia has become the company to beat in graphics over the past few years, fueled by strong sales and premier design wins. In November, the Santa Clara, Calif.-based company passed ATI Technologies to become the top manufacturer of graphics chips, according to Mercury Research. Production and performance are the company's hallmarks.

"Even if you go back two or three years ago, Nvidia was producing chips at a faster rate than ATI," Glaskowsky said. "They were producing more chips and improving them at a faster rate."

"There is a lot of expertise in the graphics business there," said Sanford Russell, senior product director of partner programs at Nvidia. "They also have a strong brand name in the retail space." Russell, however, added that it has not been determined whether Nvidia will continue to maintain any of 3dfx's brands for the indefinite future.

 

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