Analysis of a Privately Owned AMD

We’ve heard the rumours from several sources that AMD is being targeted for a private equity buyout. While most people have negative associations with corporate takeovers, this doesn’t necessarily mean a bad thing for AMD. Current global market conditions have allowed private equity investments to flourish, making it easy to raise large sums of cash at favourable rates. The general idea is to buyout an undervalued public company, take it out of the stock market, re-invest, increase its value then sell when it matures. AMD today is perceived to be undervalued relative to its capital and revenue potential. I am aware that AMD is predicted to be in the red for the next 2 years, but bear in mind that future earnings for the next 2 years are not as important in a privately held company as if it was publicly owned.

Privately owned companies do have several advantages which can benefit AMD. One that quickly comes to mind is the absence of restriction and influence of the media and the stock market in making business decisions. Management can make huge and risky decisions like build or decommision a Fab without the pressure of stock market fluctuations and negative valuation. AMD needs this at the moment as their current business model doesn’t seem to generate enough revenue to turn a profit for the next several quarters. AMD needs a major overhaul.

Another advantage privately owned companies have has something to do with the quality and effectiveness of the management. The CEO’s compensation terms are never publicly declared in a PE company. This allows the new owners to select the best people to do the job. Top level management can also be compensated generously in proportion to financial performance. The scrutiny of investors, the board nor the financial governing body does not exist in such internal affairs. The absence of publicly reporting financial results relieves CEO’s from the time consuming tasks of managing investors and the media. This leaves the CEO to focus 100% of its time to improving the company.

The timescale to improve is definite and relatively short-term. The goal of creating value for the private equity owners in the span of 3-5 years drives quick and drastic changes. Major changes that publicly owned companies wouldn’t be allowed to do without the lengthy investor consensus or board approval. In the last few quarters AMD spent a lot of time media massaging and creating PowerPoint presentation just to calm investor anxiety. The benefits of focusing only on solving internal issues are obvious.

There is one critical disadvantage for AMD if it goes private and it has to do with its long term survivability. Private equity investors typically sell the company once the rate of return on investment reaches it peak. This is typically within the 3-5 year window and for a microprocessor company, this is pretty much short-term. The main objective why PE funds engage in such activity is obviously to make money. Heavy R&D investments for future products 5 to 10 years down the line may not hold special interest to PE owners as these are long-term spending which doesn’t necessarily add value to the company at its present state when it is time to sell. This doesn’t mean that there will be absolutely no spending on R&D. It just means that it is safe to assume that Intel will care more about its long term future than a privately owned AMD which hopes to sell the company in a few years. Generally, PE investors focus on optimising mid-term value gains which in some cases have detrimental impact to the long term viability of the company.

As it stands today, AMD’s long term survivability is in danger anyway so a private buyout should be welcomed. This is the biggest reason why AMD’s stock has been slowly climbing. A PE buyout normally pays a premium. Being owned by a private equity with a bottomless cash supply should allow AMD to transform into whatever it needs to and as quickly as it wants to. For the industry watchers this can get a bit dull with AMD having less interest in public hyping. Focusing more on making money rather than gaining popularity.