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S3 buys Diamond Multimedia

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S3 has turned predator with the $175 million share acquisition of Diamond Multimedia. Well, well, well. That will teach us to listen to our California chip friends, who swore blind that S3 was being stalked by its smaller rival 3dfx. (We still think this is, or rather was, true). With Diamond, S3 is now far too big for 3dfx to contemplate a hostile bid. This gives it a ready-made board supplier to play with, just like 3dfx (which bought STB last year). More importantly Diamond has a huge retail presence, to back up its OEM business. S3 hopes to retain other retail board customers -- the company has learnt from what we consider to be 3dfx's tactical error following the STB buy. Remember, 3dfx said it would junk other retail board makers, and then considered backtracking (because STB's retail channel was not strong enough in Europe). In the event, 3dfx is ploughing on by itself Through Diamond, S3 also becomes an all-round multimedia player -- Diamond makes the Rio Internet music player, modems and sound cards, as well as graphics boards. S3 has turned itself around nicely in recent months. It's got a new chip, the S4, that OEMs actually want to buy; it's got a sweet cross-patent deal with Intel; and it's got cash -- about $120 million, and $600 million worth of United Microelectronics stock. Even if it doesn't sell the stock in one go (bad for tax reasons as well as UMC share price), S3 has some hefty collateral at its disposal. S3 shareholders will hope the company will spend its UMC paper mountain wisely. The Diamond buy looks a useful first step. ®

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