The rumours about possible takeover of Advanced Micro Devices, currently the second biggest supplier of x86 central processing units with 25% market share, resurrected on Monday and Tuesday, which influenced stock price of the chipmaker.
“The volume in AMD March calls have been abnormally high,” said Steve Sosnick, equity risk manager at Timber Hill, a division of Interactive Brokers Group, in an interview with Reuters news-agency. “There are rumors of a private equity buyout. At least in the near term, the options market is giving some credence to these rumors.”
One of the rumours that are being spread over message boards is that IBM may be planning to acquire chipmaker AMD. The move, however, would not fit into IBM’s strategy of shifting away from making business with end-users as well as small businesses and their suppliers while concentrating on large enterprises and services. Moreover, as a strong player in server market, IBM should keep in mind that after acquisition of AMD it would have to transit all of its servers to the Opteron chips from Xeon chips, which may not be the best strategy.
On the other hand, IBM may understand business of AMD much better than a private-equity would. For example, IBM might help AMD to fund production capacity boost, something that the company requires to sustain its market share growth, as, according to AMD’s chief executive, the company faced too strong demand in the third and fourth quarters and could not supply as many chips as it “would have liked” to the channel partners. But IBM, as well as all the other suppliers of computing products, including large makers of PCs and servers, depend on chip supplies from Intel and would hardly take the risk to acquire AMD even considering the current stock price at 52-weeks low due to poor financial performance of AMD amid price-war with Intel and the company’s graphics product group struggling to deliver next-generation offering.
“We are not satisfied with our financial performance in Q4. […] We need to improve our financial performance relative to what we delivered in Q4. We will do so by delivering improved products, lowering our manufacturing costs, increasing our operating efficiencies across all disciplines, and continuing to grow share,” said Dirk Meyer, president and chief operating officer for AMD, said during the most recent quarterly conference call with analysts.
According to analysts, while the takeover may not take place, AMD’s recent financial performance calls to be improved and, perhaps, AMD may need additional investments.
“I think essentially the rumors are borne of AMD's weak balance sheet,” said JoAnne Feeney, an analyst at FTN Midwest Securities. “When they acquired ATI, they had to borrow quite a lot to finance that purchase and that’s created a higher debt-to-capital ratio than they had in the past. It’s still in that squeeze.”
But AMD seems to have a plan how to improve its financial performance. The company is ramping up manufacturing using 65nm process technology, which allows it to make chips more cost-efficient and decrease pricing without sacrificing margins. The chipmaker continues to gain market share in desktop and mobile segments and hopes to recapture its positions in the server market with new quad-core chips. In addition, the firm plans to launch 45nm process technology online in mid-2008 and present its Fusion processors that combine x86 and graphics processors in 2009.