SANTA CLARA, Calif. -- Following its disclosure earlier this week that it's considering a spinoff of its chip operations, graphics-chip maker S3 Inc. has engaged in negotiations with Via Technologies Inc., according to sources close to the talks.
Although no agreement has been reached, the companies close working relationship was said to have spurred the initial contact.
"Via would certainly be the leading candidate," said Jon Peddie, analyst with research firm Jon Peddie Associates in Tiburon, Calif.
A spokesman for Via, a chip-set manufacturer based in Taipei, Taiwan, refused to either confirm or deny that talks had taken place. By late Thursday, a spokesman for S3 had not returned calls asking for comment.
That talks were held is unsurprising, given that the companies already have formed S3-Via Inc., a separate concern created to combine the companies' respective graphics and core-logic chipset technologies in devices for the low-end PC market.
Earlier this week, S3 confirmed 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." (see March 29 story).
Sources at S3 said management had leaked word a week ago that thecompany's Multimedia Division -- the chip business and related add-on cards sold under the Diamond Multimedia name -- had been sold to Via. The announcement was later retracted, although sources close to the issue said talks continue. Sources were unclear whether the talks included the chip business, or the entire Multimedia Division and possibly the Diamond brand name.
S3 has forged a brand identity as a maker of 3-D graphics chips, but
ironically, its graphics business may be viewed by management as the weakest part of the company, according to observers. Since buying Diamond Multimedia Inc. for about $128 million in stock in June 1999, S3's core graphics business has been overshadowed by retail products like the Diamond Rio consumer MP3 player and the add-on card business Diamond brought to S3.
As a result, that may mean S3 will actually jettison its chip business altogether, rather than maintain a stake in it, observers said. "S3's not a graphics company any more," said Mark Edelstone, analyst for Morgan Stanley Dean Witter & Co. in San Francisco.
"In the graphics business, it's tough to have a positive [profit and loss statement]," added Dean McCarron, analyst with Mercury Research Inc., Scottsdale, Ariz. "If you look at the typical 'hockey stick' [earnings chart] of the Internet stocks, graphics chips [companies] are already at the top."