AMD As A Private Company? Not As Good As It Sounds (AMD, INTC)

Advanced Micro Devices (AMD-NYSE) is up 2% ahead of its investor meeting and on the day of the Intel (INTC-NASDAQ) analyst meeting.  Last night Investors Business Daily noted the possibilities of the company going private.  Here is what is stated:

In the conference call, Chief Executive Hector Ruiz said the company is looking at all possibilities.

Asked about rumors that private equity investors are interested in AMD, Ruiz responded: "I think your question was about being a public company vs. a private company. It’s like everything else. If it’s something that we think makes sense for our shareholders, we will certainly consider and look at it."

The simple truth is that if Ruiz would have said an outright "NO" or if he would have dusted it off, he would knowingly have been removing at least some sort of theoretical floor in the company.   There were two deals that the hopefuls can refer to for this.  Blackstone did take Freescale private in a huge deal valued at some $17.6 Billion, and a KKR-Silver Lake team bought most of Philips Electronics semiconductor unit for about $10 Billion.  Unfortunately, AMD doesn’t make as much sense.  Both of those other companies have large exposure to what is a commoditized chip business.  In the processor world as far as these two companies are concerned, it boils mostly down to Intel versus AMD.  Could a private equity firm really compete better against Intel than the team has at AMD?

Sure, AMD bought ATI for what was valued at $5.4 Billion at the time of the announcement.  There is still some value there, but right now NVIDIA (NVDA-NASDAQ) is sort of thought of as having the upper hand in the graphic card arena.  That is the prevailing opinion anyway.  ATI could still be theoretically sold back off by a buyer if need be in a valuation break-down, but then you would be back at square one with a more indebted processor manufacturer that competes against a monopoly.  We noted this last capital raise out of AMD was also voodoo financing, and a ‘privateer’ may recognize this too. 

AMD has at least made a laptop processor announcement this morning that is helping, but the words "takeover" or "going private" published by the likes of an IBD will take precedent over faster chip claims today in a "merger world gone wild" investment climate.  Intel is out saying that they expect profit growth to outpace revenues and that they intend to reclaim lost market share.  Who wants to compete against that with new money?

Unless some private equity firm knows that some antitrust issues are going to become much more heated up and that the winner will be due a windfall, then this makes less sense than other buyout speculations.  Even if an offer came, it might fall on deaf ears.  The stock entered 2007 right at $20.00 and the stock was at $30.00+ right before last summer.  There are quite a few holders who would demand a substantially higher price compared to current levels, and using traditional valuation models right now based on today’s information doesn’t exactly make this seem as promising as other situations with better cash flows and better environments not as dominated by one behemoth.

AMD also has high enough needs in R&D and cap-ex spending that it probably needs to be public more than it needs to be able to enjoy some of the current privileges held by private companies.  AMD’s debt covenants are also restrictive upon any new cash raised and cash flows.  If you had the money to buy this company, you would probably be able to easily see that there are better or at least safer alternatives out there for your billions of dollars. 

It is no fun just kicking a company while it is down.  It’s always possible that AMD has a new power punch up its sleeve, butthe current environment is one of a price war now that processors aregetting above and beyond what most computers need.  If it has more surprises and can regain its footing or at least do "less bad", then the stock could recover.  Maybe a private equity firm would want a stake, but all of it seems a stretch.  It just doesn’t make sense to try to look at this one as a private company based on the available information.  That’s my two-cents anyhow.

Jon C. Ogg
May 3, 2007

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