An Impartial Assessment of the Likelihood of an AMD Bankruptcy

The road to bankruptcy is a downward spiral. Both camps from the AMD-Intel debate wonders about the same question: Is AMD on that road?
The only way to find out is to study other cases of business failures in the past, analyse the negative signs which led to bankruptcy and try and see if the same signs and symptoms applies to AMD. It is important to realise that each company is unique in its circumstance. What appears to be exceptional in AMD’s case is that the company is accustomed to financial difficulty. Anyone wishing to understand if AMD is indeed on the road to Chapter11 needs to be able to separate what is unique in AMD’s troubles today from its troubles in the past.

There are 3 stages in the life of a business/corporation where the risk of failure is elevated. By order of risks, the 3 stages are 1) the Start-up, 2) Aggressive Expansion and 3)Business Inflexibility. Start-up bankruptcies are quite common especially during the internet bubble. Business Inflexibility usually happens when a company has had too much success in the past that it fails to adjust to current market changes. Automotive and Airlines companies tend to fall into these categories. Interestingly AMD falls into the Aggressive Expansion stage. This is the stage where the company has an innovative product, sees great demand for the product and therefore has no choice but to expand to meet the demand. It is at this stage that a company borrows money to meet capital expenditures. This is common practice and there is nothing wrong with such a strategy. The result is simply a higher debt/equity ratio which exposes AMD to greater environmental risks.

In 2006 AMD further increases its debt/equity ratio with the purchase of ATI. One needs to remember that the terms of the loan agreement is always a good indicator of perceived business risks and investor confidence. Least to say, the strict loan terms stipulated in the ATI loan shows a decline in confidence and perceived higher risks. The key note to remember is that in every “post-expansion” bankruptcy case, it is not the debt that is the fundamental cause of the collapse but rather the complete lack of confidence from the investing community. For AMD, at the moment the general feeling is a “wait and see” attitude as AMD is in the midst of restructuring. While the stock seems to be in the upside, one has to wonder if lack of direct creditors the real reason for AMD’s decision to issue 1.8B worth of private notes. Investor capitulation is one of the negative signs of impeding bankruptcy.

The second factor that compounds the problems of financially distressed companies is that suppliers and customers become reluctant to do business. It is natural for the other businesses in the eco-system (supply chain) to shield themselves from the risks in case the failing company collapses. We’ve heard AMD losing the channel by becoming unreliable in shipping products. Today, AMD not only needs to convince its channel partners that the deliveries will arrive; they have to convince them that they are not going away anytime soon. The decline of the eco-system will inevitably result to poorer sales which is a key ingredient of the downward spiral. Although we’ve seen alarming reports about AMD’s poor channel sales, it is too early to say that the changes are irreversible.

The 3rd sign for a post-expansion bankruptcy is the inability of management to restructure after the post-expansion sales collapse. A failed aggressive expansion is normally a result of overestimation of future sales, overlooked environmental changes, and underestimated expenses. I don’t suppose anyone can argue that AMD’s decline in sales and underestimation of Intel’s product line contributed to its poor earnings. But the key requirement for a company to go south is not so much about financial metrics as it is the response to its market contraction. AMD badly needs to reduce its size to its current and smaller market for it stop the bleeding. A lot of investors are waiting to see if AMD’s restructuring plans are adequate enough for its size against its contracted market. It is hard to say at this point if AMD will respond correctly.


In summary, the signs of an impeding AMD bankruptcy aren’t clear cut. While we’ve seen some signs of decline in investor confidence and business support like (Sun, Google, channel suppliers), there is no evidence that the changes are absolute or permanent. We have to wait and see what changes AMD brings to the table. Like any post-expansion problems, AMD is faced with severe cash-flow problems, crippling debt and a significantly smaller market.
If there is anything significantly different between AMD’s old problems from today, this time around AMD is coming from an aggressive expansion. Remember the bigger the company's size is, the bigger the loses, the quicker the collapse. AMD needs to act quick this time.