Can Applied Materials & AMD Rumors Hold Any Truth?

There is an interesting article out today regarding a potential merger where Applied Materials (AMAT-NASDAQ) is reportedly considering a merger with troubled Advanced Micro Devices (AMD-NYSE).  This is not just different than prior rumors that private equity may have an interest in AMD.  This would be a true game-changer if there is any truth to it, although investors have more reasons to be skeptical than they have to be hopeful.

The article located on The Inquirer website does claim that both companies have denied this vigorously.  The truth is that Applied Materials would be gambling its core business on the cap-ex sides of chip equipment and testing if it were to acquire AMD.  How would you like to be relying on a cap-ex supplier that also competes with you on dowstream sales or may be soon?  Applied would have to weigh how much customer base they would lose on a core operating basis against what it could pick-up in business against Intel (INTC-NASDAQ) in processor sales and what it would gain by having end-user graphic chip sales of ATI Technologies under the AMD brand.

If there is any truth, Applied could kiss away any business from Intel in processors, others in graphics chips, and elsewhere in memory. Applied Materials counted 11% of its direct revenues as being tied to Samsung Electronics, but said that back to 2004 no other customer represented 10% of its sales. 

If there was a preceived chance that this would really be in the works, you’d probably see a bit more reaction in the stocks.  AMD shares are flat to down, and were only up for a short period based on this rumor.  Applied Materials shares are down 0.5% as well.  Applied has a maket cap of $27 Billion, compared to less than $8 Billion at AMD.  Anything is possible, but trading in the markets usually shows the best vote of confidence out there.

Jon C. Ogg
April 23, 2007

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