AMD's $1.8 Billion Voodoo Financing Announcement

What’s the best thing to do when you are in the midst of losing a price war THAT YOU STARTED?  Go convince Main Street that you can win what you have been losing if they will loan you more money to throw into the fire….
That is just what Advanced Micro Devices (AMD-NYSE) is doing, and if you believe after reading through this that it is a good financing then we have a bridge to sell you.  The company is raising $1.8 Billion in convertible senior notes, and the convertible (strike) price will be at roughly 3-times the stock price and is planning a price cap on these, WITH YOUR MONEY.  The interest rate, conversion price and other terms of the notes will be determined by negotiations between AMD and the initial purchasers of the notes.  Please read on over the capping and use of proceeds.

AMD expects to enter into capped call transactions which are intended to reduce the potential dilution to AMD’s common stockholders upon any conversion of the notes. The capped call transactions are expected to have a strike price that matches the conversion price of the convertible notes at approximately three times the closing price of its common stock on the date the capped call transactions are executed.

Look at the USE OF PROCEEDS: AMD expects to use a portion of the net proceeds of the offering to pay the cost of the capped call transactions. If the initial purchasers exercise their option to purchase additional notes, AMD expects to use a portion of the net proceeds from the sale of additional notes to enter into additional capped call transactions. AMD expects to use at least $500 million of the remaining net proceeds of the offering to repay a portion of the term loan AMD entered into with Morgan Stanley Senior Funding, Inc. to finance a portion of the purchase price of, and expenses related to, the acquisition of ATI Technologies Inc. AMD expects to use any amounts not applied to the repayment of the term loan for general corporate purposes, including working capital and capital expenditures.

When you read things like this, it is hard to wonder just how the investment bankers that came up with the deal were able to keep a straight face while trying to get the company to do it.  More importantly, you have to wonder if the brokers selling this won’t be hitting the mute button when they call clients so the clients can’t hear them laughing.

The good news is that this is 144A, so it is unregistered and only available for select institutions.  That will keep Joe Q. Public from taking one on the chin as far as being able to buy this offering, but it also means the institutions just got a more ratcheted place in line as a creditor if or when this heads further south.  The stock’s high over the last two years is $40.00+, and shares closed at $14.04 today.  In after-hours trading shares are down almost 3%, and that’s a good indication that this one can’t be trusted.  Maybe the company will get its feet back and maybe it won’t, but this one is a classic example of voodoo financing at its best.

This one also probably makes any truth to rumors that Applied Materials (AMAT-NASDAQ) wanted to buy it further from likely.  When you take on debt to pay some debt and enter financing transactions, that’s just leverage for the sake of leverage.

Jon C. Ogg
April 23, 2007

Jon Ogg can be reached at [email protected]; he does not own securities in the companies he covers.