Is AMD vulnerable to takeover?

There is little question that somewhere, amongst all the red ink on the balance sheet, AMD is a tasty potential target for a big firm with an itchy cheque book.

It's the number two-ranked processor maker in the world, the number two graphics card technology maker, a business with fingers in umpteen pies and with a considerable amount of real estate on the books. There's plenty there that appeals and which can be monetised even more than it already is.

However, it's also losing. Losing money, losing market share, and losing confidence. Right here right now, there's little clear indication of how it is going to effectively re-seize the initiative.

Looking back to the start of 2006, AMD was the processor maker of choice for many in the server market, and for home enthusiasts. Its Opteron and Athlon 64 processor lines had won AMD significant business at two ends of the market, and there was a real brand affection for a firm seemingly focused on delivering better and cheaper products than Intel, its main rival.

Changes

Much has changed since then. First and foremost, Intel hit paydirt in some style with its Conroe processor technology, in a matter of months wiping away AMD's work of many years in the home sector thanks to cost-efficient, overclocking-friendly and top performing Core 2 Duo and Quad processors. All of a sudden, AMD is trying to play catch up, but not quickly enough. While it is in the process of moving its processor line to 65nm technology, and readying its native quad core processor products, Intel is issuing announcements about its 45nm Penryn technology. Now appreciating that Intel's is widely perceived to be a paper announcement right now, with volume not likely until the middle of next year, it's still a tangible spoiler tactic at a point when AMD need the playing field as much to themselves as possible.

AMD's Barcelona technology, which is being rolled into the Phenom line of processor products (expected to debut in the server space), is one of a couple of product lines it's banking heavily on. With even the more evangelical analysts questioning AMD's ability to get the technology out in quantity before Intel presses home its advantage, not helped by continual rumours of further delays to Barcelona and Phenom, there's a tough fight ahead.

The merged beast

Add into the equation the ATI merger, first announced last summer. This hasn't, it's fair to say, been the smoothest of rides, draining the AMD coffers at a point where it needed far more on its side to take the fight to its rivals. On paper, there's real logic to the merger itself, and the long term benefits - assuming the bank account doesn't empty first - are real and obvious.

ATI is a major - and clever - player in the graphics market. And while it's been usurped by NVidia of late at the performance end, ATI has wisely made sure their graphics technology isn't just PC reliant - you'll find it in games consoles, portable devices, set-top boxes and far more besides. Just the kind of market AMD could do with pushing into with its processor line.

Secondly, there are some manufacturing and design crossovers, in addition to the economies between the graphics and processor markets. When you include the design and manufacture of motherboard chipset technologies too, then a united AMD/ATI has a major stack of chips at the table, come what may.

Finally, there's the intriguing, but inevitably delayed, Fusion project. Fusion seeks to amalgamate both processor and graphics on the same die, with effectively a modular approach to adding further technologies from a selection of choices, to allow AMD to tailor products to individual marketplaces. It's wise thinking, but no doubt proving a time-consuming and involving strategy to implement.

The vulnerability

And here's where AMD's vulnerability lies: it doesn't have time on its side. It's a firm in second place in both of the market spaces it relies on, and worryingly, it isn't gaining ground. If anything, it's being more and more outthought and outflanked by a wary pair of opponents in Intel and NVidia, who themselves have the option, surely, of joining forces to create a powerhouse of their own. The recent talk that its Barcelona-powered products won't arrive until the Autumn - rebutted by AMD - hit its share price in the US, to the point where it's half the level it was at this time last year.

The other reason the clock is ticking? The AMD bank balance is not in good shape. In April, infamously, the firm was down to $1.2bn in the bank: a big amount to you and me, but an amount that invoked borderline-crisis reaction among some. The firm took on more debt to free itself up and give itself more operating capital, but that's not a long-term measure by any means.

Meanwhile, it's expected to announce that it's going to outsource some of its fabrication work from 2008, which will at least free up some of the tens of billions of dollars it has tied up in its extremely expensive manufacturing plants. Still, with Barcelona running behind and the R600 range of graphics products failing to blow critics away thus far, the short term future for AMD is best described as challenging.

Takeover talk?

Which is why, once again, talk of potential takeovers has begun to surface. It's not the first time, of course, that AMD has been a rumoured acquisition target, but in the past it's tended to be in a position of strength when said rumours arose.

Back in 1999, Siemens were linked with a takeover at a level of $40 a share (pretty much treble the current stock price), but it came to nothing. Further speculation followed the year after, with no firm names mentioned, but very definite interest in picking up a then-growing processor business.

Who would be interested this time around? That's a tough one to call. IBM has been mooted as one possible shopper for the AMD empire, not least because it's perceived to have cash available to fund such a takeover and provide working capital. There is also the fact that IBM's Cell processors are going down well in PlayStation 3 consoles, and mixing in AMD's expertise could prove to be a natural fit.

Yet there's little sign at all that IBM is interested in a deal, even though it would be remiss at this stage to rule one out.

The more likely angle here is private equity, a sector increasingly looking to invest in technology businesses. The appeal for private equity is clear: AMD's share price is comparably low and therefore attractive at the moment, and there's also a lot of potential to splinter elements of the business in different directions. Add in the fact that technology businesses are believed to have legs for the future, and there are real reasons for outside buyers to take an interest.

Factor in too that private equity companies would also likely liquidise some of AMD's key assets - those fabrication plants again come into focus - and instead rely on quicker, outsourced solutions. It'd be a swift way to bring a substantial amount of working capital into the business, although not a method without its downsides.

But the problem here is that AMD's balance sheet is riddled with debt. The ATI takeover is still fresh on the books, accounting for a cool $5.4bn. Plus AMD is also making an operational loss, in a market where there's little chance of a quick turnaround, and even less chance of a quick buck. Those factors are putting off many of the keener suitors in the technology space right now, and private equity businesses are keenly aware of that too. And if AMD move quickly and dispose of some of their own fabrication facilities, that may flush the books enough to allow the firm to hold off a potential takeover anyway.

There is, though, one trump card yet to be realised, and that's the ongoing litigation with Intel. AMD has launched an antitrust suit against its main rival, amidst allegations of Intel forcing manufacturers and distributors to take its chips. Should AMD emerge victorious, then there's genuine potential for a turnaround. The problem? A tangible resolution to the case is years away. And we're back to the ever-ticking clock.

Vulnerable?

Ultimately, the AMD story simply isn't clear. In one sense, it's absolutely vulnerable to takeover, and has never been more so. Conversely, it's rarely been in a less attractive state for buyers, certainly not in the past few years. AMD has major challenges to face, and the depth of the problems it finds itself in right now may be enough to hold off any predators. Assuming, as is likely, it begins to make progress in its key sectors over the next year, and manages to get its new product lines in sufficient quantity to market (while holding onto tie-ups with the likes of Dell), AMD is likely to evade the current shopping spree in the technology sector. Just not for the right reasons, it seems.

Our prediction: don't expect the cheque books to coming out in the immediate future, but AMD's next couple of years are set to be extremely testing.

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