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S3 sells chip business, shifts to Net appliances

S3 Inc. (Nasdaq: SIII) is selling graphics chip business and shifting into the Internet appliance business, the company said Tuesday.

Shares closed at 18 Monday, down slightly from a 52-week high of 24 13/16 hit March 24. The company's focus had been making multimedia acceleration hardware and software for the PC market.

S3 is selling its unit which makes graphics chips for personal computers to a newly formed joint venture with Taiwan's VIA Technologies Inc. for about $323 million in cash and securities.

But S3 will retain ownership of? the add-in card business, which features the Viper and Stealth product lines used by gamers to soup up graphics on their PCs.

As part of the agreement S3 will sell 3 million shares of its stock to VIA Technologies at a price coinciding with the signing of the definitive agreement.

"With this announcement, we've effectively completed the first phase of our long-term growth plan, transforming S3 from a graphics focused semiconductor supplier to a well-positioned Internet appliance company,'' CEO and chairman Ken Potshner said in a statement.

The company said its potential growth as an Internet appliance company far outweighs that offered by PC graphics chip products. Its Internet-related businesses showed rapid growth in the most recently announced fourth quarter of 1999, up 46 percent over the previous quarter, led by a 76 percent quarter to quarter growth in revenue for its flagship Rio products. S3 acquired Rio and its Net appliance focus when it bought Diamond Multimedia last year.

S3's technology assets include its Rio family of digital audio players and HomeFree series of home networking solutions, as well as its forthcoming DSL Residential Gateway and Transmeta-powered Internet appliances.

S3 also has holdings in United Microelectronics Corporation (UMC) valued at about $1 billion, and a 41 percent equity stake in, Inc.

S3 also said its transformation will involve exploring alternative strategies, including partnerships and joint ventures, relative to its ongoing multimedia board business.

S3 said the VIA transaction is expected to be completed prior to its third quarter and customers should not expect disruptions of any kind.

S3's competitors in the graphics business include ATI Technology (Nasdaq: ATYT), 3Dfx (Nasdaq: TDFX) and NeoMagic (Nasdaq: NMGC). Internet appliance makers include companies such as EMachines (Nasdaq: EEEE), Palm (Nasdaq: PALM) and Microsoft (Nasdaq: MSFT)'s WebTV.

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