S3 to sell graphics biz, but who's buying?

— 12:12 AM on March 30, 2000

Vertical integration in the graphics market took another kick in the teeth (from the boot of market consolidation) as S3 issued this brief press release today:

SANTA CLARA, Calif. — March 29, 2000 — S3 Incorporated® (Nasdaq: SIII) announced today that it is in discussions with and has received term sheets from several companies relating to the separation of S3’s graphics business from the remainder of its businesses. The company stated today that it is assessing all opportunities and is committed to choosing a path that will take into account the interests of its stockholders, customers and employees. The company had no further comments with respect to these matters. There can be no assurance that any transaction will result from the discussions.
So this the the chain of events: S3 buys Diamond in order to integrate vertically, Diamond moves toward sellng only S3-based graphics cards, and now S3 moves to spin off its graphics division. Funky. What did S3 bring to the party other than its graphics biz, really? (Money, I suppose.)

Who do you think is going to buy S3's graphics business? 3dfx just made a purchase, and I doubt they care to buy up S3.

Another possible suitor is NVIDIA, who might be looking to get a hold of S3's graphics patents, designs, and engineering teams. Now here is something interesting. The two companies signed a broad cross-licensing deal not long ago, and NVIDIA moved to sell $400 million worth of stock today. Note this bit of info from the NVIDIA press release:

NVIDIA will use the proceeds of future sales of debt or common stock under the first registration statement to fund anticipated growth, including anticipated increases in inventory and accounts receivable; for potential acquisitions; [emphasis mine] for costs associated with NVIDIA's expected move to new facilities; and for general working capital. NVIDIA will not receive any proceeds from the sale of common stock by the selling stockholders.
Coincidence? Perhaps, but NVIDIA was sweet on S3's patent portfolio at the time they signed their cross-licensing deal. NVIDIA president and CEO Jen-Hsun Huang said at the time:
Over the years, S3 has developed and acquired a rich portfolio of technologies in graphics, multimedia, microprocessors and system logic. Our license agreements with SGI and S3, combined with NVIDIA's rich technology patent portfolio, gives us a strong technology base on which to build winning products.
You may recall that S3 won the bidding war for Exponential's 45 patents related to high-speed microprocessors, which they then used to gain access to Intel's patents in another cross-licensing deal.

In short, S3 has a patent portfolio of considerable value, and the sale of their graphics business—potentially along with these patents—could bring a very nice price. If S3's assets were combined with NVIDIA's own patent portfolio, well, I don't know if anyone would be legally allowed to compete with NVIDIA. I get the impression that together with SGI (another NVIDIA cross-licensee), NVIDIA would practically own lit/shaded/textured polygon-based 3D rendering. Crazy.

NVIDIA would likely also get its one of its biggest OEM and retail customers back—Diamond. Monster 3D GeForce anyone?

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