July 21 (Bloomberg) -- Advanced Micro Devices Inc., the world's second-biggest maker of microprocessors, plans to buy ATI Technologies Inc. for about $5.5 billion, according to a person involved in the negotiations.

A deal for Markham, Ontario-based ATI may be struck in the next few days, according to two people briefed on the discussions, who declined to be identified because the talks are confidential.

ATI is battling with Nvidia Corp. to be the No. 2 maker of computer-graphics chips behind Intel Corp. Buying ATI may help Sunnyvale, California-based Advanced Micro in its efforts to keep taking market share from Intel, the world's largest semiconductor maker. The purchase would be the biggest in Advanced Micro's 37- year history and signal its commitment to challenging Intel.

``It may be a step AMD has to take,'' said Cody Acree, an analyst at Stifel Nicolaus & Co. in Baltimore. He rates Advanced Micro shares ``hold'' and said he doesn't own them. ``They may be saying, `If I'm going to be an Intel equivalent, I need to be able to offer the market the things Intel can.'''

Dave Kroll, a spokesman for Advanced Micro, said the company doesn't comment on rumor or speculation. ``It's still a rumor to me and no one here can speculate on rumors,'' ATI spokesman Dave Erskine said.

The Globe and Mail newspaper earlier reported that Advanced Micro is considering an offer of $21 to $23 a share. ATI jumped $1.36 to $17.92 in extended Nasdaq Stock Market composite trading, up 13 percent from the close on July 20.

Shares of Advanced Micro fell 31 cents to $17.95 in extended New York Stock Exchange composite trading on concern it may pay too much.

Taking Share

Buying ATI would allow Advanced Micro to package graphics chips with its latest processors and get them to customers faster, Acree said.

Advanced Micro cut Santa Clara, California-based Intel's market share to less than 80 percent in 2005 for the first time in four years. Chief Executive Officer Hector Ruiz is aiming to steal more customers by boosting capacity and pushing out new products.

Advanced Micro in May won its first order from Round Rock, Texas-based Dell Inc., the world's biggest personal-computer maker, cracking a 22-year exclusive relationship with Intel.

ATI has been playing catch-up with Nvidia in PC graphics chips after last year missing an upgrade cycle for the most profitable and powerful semiconductors.

May Pick Up

Chief Executive Officer David Orton said last month that sales at the PC unit had been slow in June and he expects demand to pick up in the second half of the year.

ATI said June 29 it had fiscal third-quarter profit of $31.9 million, or 12 cents a share, compared with a loss of $450,000, or break-even on a per-share basis, a year earlier. Sales gained 23 percent to $652.3 million.

Advanced Micro's strategy to have its own graphics chip through the ATI purchase may backfire because it would limit the company's choices in the future, Acree said.

``One of the reasons AMD works as well as it does is because it has a lot of flexibility,'' Acree said. ``By tying themselves to ATI, they're tying themselves to a low-margin business that has extremely short lifecycles. It may be a little limiting.''

To contact the reporter on this story: Ian King in San Francisco at ianking@bloomberg.net

Last Updated: July 21, 2006 17:19 EDT