The federal deadline to transition from analog to digital television will mean dollar signs for Broadcom, which is expanding in both U.S. and emerging markets.

On Monday, the chipmaker announced it would buy Advanced Micro Devices' digital television chip business for $192.8 million in cash in order to expand its digital television offerings. On Feb. 17, the Federal Communications Commission has said that all broadcast television stations in the U.S. will stop broadcasting on analog airwaves and begin broadcasting only in digital.

Broadcom wants to take advantage of this rapidly growing market, said Stifel Nicolaus analyst Cody G. Acree. Because digital television was not AMD's core business, it was not profitable and the company was unable to monopolize on it, he said. Last quarter, AMD announced it listed its DTV business as discontinued operations and that it was selling the business.

Acree said that another boost to Broadcom will come from emerging markets. As the U.S. moves to digital television, the emerging markets will follow suit, he said. "If the U.S. is not buying digital TVs, they will stop making them," he said. "So the emerging markets will have to move to digital by default."

"It's good news for both companies," Acree said.

Advanced Micro Devices investors agreed, sending its shares up 2.4%, or 14 cents, to $5.95 at the close. AMD shares have fallen 20.9% since the beginning of the year as it lags behind larger rival Intel in the microprocessor market. Making matters worse, AMD has reported seven straight quarterly net losses. Also, Chief Executive Officer Hector Ruiz stepped down last month.

Meanwhile, Standard & Poor's analyst Clyde Motevirgen cut his rating on Monday on AMD to "sell" from "hold" on a valuation basis. Motevirgen said that while the deal will "provide needed cash and reduce operating expenses," and an expected increase in sales of new chips should help margins, he thinks "losses will continue to weigh on the stock." Motevirgen maintains a $5.50 price target.

While AMD investors have gotten slammed, Intel's share of the central processor market surged to 80.5% in the second quarter from 79.2% during the first quarter, according to Mercury Research.

The acquisition lets AMD focus on its core operations, said Dirk Meyer, CEO of AMD. "The sale of our DTV business is a key step in AMD's transformation, helping to strengthen our balance sheet, lower our break even point, and hone our focus in order to take full advantage of our position as a leader in both microprocessors and graphics technology," he said.

Meanwhile, Broadcom shares fell 4.6%, or $1.25, to $26.17, after the company said the deal would hurt earnings in the first year.

Broadcom makes chips for a range of consumer electronics including cell phones and set-top boxes and had previously focused on chips for more expensive TVs. According to Revere Data, Broadcom's biggest customers are Motorola and Cisco Systems.

Broadcom said it planned to offer jobs to 530 AMD employees. It said the boards of each company had approved the deal and shareholder approval is not required by either company.

Broadcom also said it may record a one-time charge for research-and-development expenses related to the acquisition in the quarter in which the transaction closes but said the amount, if any, had yet to be determined.

The closing is expected to occur during Broadcom's fourth quarter ending Dec. 31, 2008. Acree said that the acquisition will be dilutive to Broadcom's business and it will likely have to cut jobs and add new customers to make the business profitable.

Source:forbes.com