An analyst said that ATI Technologies, a major supplier of graphics processors and chipsets, may be a target for acquisition by Advanced Micro Devices, the world’s second largest producer of x86 microprocessors. Potentially, the acquisition would allow AMD to offer top-to-bottom platform solutions, but would also mean manufacturing capacity constraints for the merged company.

“The synergies of this seem consistent with the recent announcements by AMD to significantly increase capacity over the next few-years. We believe ATI is a rare-buy in the semiconductor space right now given the near-term tie-up dynamics,” wrote RBC Market Capitals analyst Apjit Walia in a note to investors Wednesday.

ATI Technologies develops graphics processing units (GPUs), core-logic sets with built-in graphics cores for personal computers, creates processors for consumer electronics or handhelds and even develops technologies for game consoles. However, the company has been losing market share in its crucially important desktop discrete market segment to Nvidia Corp., which did not turn its earnings into red, but which did impact its earnings negatively.

Theoretically, if AMD buys ATI, it will be able to offer all-in-one platform solutions like its competitor Intel Corp. does. However, ATI does not manufacture, but outsources its production to third parties and if AMD wants to be just like Intel, it will have to make ATI’s chips itself, which may result into further tight supply of microprocessors by AMD and GPUs or other products by ATI. Moreover, investments into another company may impact AMD’s ability to spend on boosting its manufacturing capacities or developing new technologies. Moreover, in the coming weeks AMD is likely to face tougher competition from Intel Corp., when the latter commercially releases its new Intel Core 2 processors for desktops and notebooks (Conroe and Merom) as well as launches Intel Xeon 5100-series chips (Woodcrest).

It has long been discussed that the graphics-companies are likely to be bought by one of the microprocessor companies, according to Mr. Walia, Forbes reports. However, for AMD-rival Intel, a partnership with a graphics company may not be the best idea.

“This tie-up might make sense for AMD at this juncture but we don’t think Intel should pursue tying-up with graphics companies and should instead look at the communications-space,” said the analyst.

At press time ATI’s market capitalization was $4.18 billion, market capitalization of AMD was $14.95 billion. Meanwhile, ATI had $607.03 million in cash, while AMD, who has been enjoying performance lead over Intel Corp. for several recent quarters, had $2.63 billion in cash.