6.04.2007

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.

10 comments:

Anonymous said...

With Barcelona delayed indefinitely, Penryn round the corner, and Nehalem for the kill, AMD has no room to breathe. BK.

Heat said...

Check this out:

Advanced Micro Devices VP Sells Shares

http://www.forbes.com/feeds/ap/2007/06/04/ap3786531.html

Hahahah when i meant AMD execs need to do more and run their mouth with BS less this is not what i meant to do.......

AMD BK Q2 08

Anonymous said...

Folks, the amount of shares sold is peanuts.... Keep in mind that executives only have certain windows they can exercise options and trade shares to prevent "insider" trading. I would not make a big deal of the shares selling.

Now if all the insiders were selling stock that would be a different story...

Heat said...

That mite be correct however the stock amount is close to 20% of the VP's total stock amount.....If 20% isnt that much to you so be it....kinda funny cuz that is also the number C2D beats K8 by......so it mite not be that much if you are an AMD fanboi or it mite be alot if you are an Intel fanboi....lol

In other news 2900XT gets whipped off the floor with the latest drivers in the latest direct x10 tests.......so all those AMD fanbois claiming great performance from better drivers.....read it and weep boys.......you guys are running out of excuses.........

http://www.legitreviews.com/article/507/3/

Heat said...

For those too lazy to get that link:

The Legit Bottom Line: The Company of Heroes DirectX 10 patch is finally here! The ATI Radeon HD 2900 XT doesn't have enough muscle to beat out the NVIDIA GeForce 8800 GTS 640MB in Company of Heroes when using the latest drivers from both companies.

Six months late and sorry just how barcelona will be.....

Anonymous said...

AMD Validated Server Program Partners Unveil First Platforms Demonstrating Upcoming Quad-Core AMD Opteron™ Processors at Computex Taipei

http://home.businesswire.com/portal/site/google/index.jsp?ndmViewId=news_view&newsId=20070604006379&newsLang=en

It appears that now AMD will advertize how Barcelona will frag K8 by 50-80% in perf per watt rather than over Intel's existing or upcoming designs.

AMD BK Q2'08

yomamafor2 said...

I have a question. Are you suggesting that AMD be taken over by a private equity company like the way Freescale was taken over?

If so, I would disagree with you on this matter. Of course, AMD needs all the money it has now to succeed, but it also needs a correct goal, and a decent team to accomplish it.

If the private equity company has no interest in sustaining AMD, or has no interest in running it, then not only AMD will lose time, goal, but also the team. In the long run, it would spell trouble for them.

Roborat, Ph. D. said...

I would not make a big deal of the shares selling.

do we know why he is selling?
In 2001 Jerry Sanders sold a lot of shares and within the next month AMD's stock dropped 50%.

Looks like its a good time to sell as the news of a fall release of Barcelona is starting to get out.

Roborat, Ph. D. said...

yomamafor2 said...
I have a question. Are you suggesting that AMD be taken over by a private equity company like the way Freescale was taken over?

A buyout doesn't necessarily mean a complete change in leadership. Of course private equity will be interested in making sure AMD's business turns around otherwise what's the point of buying AMD.
The key message that i'm trying to convey is that the goal of PE owners is to make a profit at the point of sale. AMD's goal to survive is to continuously spend on R&D. I'm trying to point out the disparity in in the two which could lead to problems for AMD when it re-enters the public market.

ilanit said...

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