According to Wikipedia, over 90% of the people who get involved in a pyramid scheme never recover their investment. Fitch, a leading credit rating agency have rated AMD’s latest offer of convertible senior notes as “Poor recovery prospects given default” with a chance of recovering investments below 10%. As an issuer, AMD is rated as a ‘B’, which we can only assume means ‘Bad’ if you look at the rate this company keeps recruiting unsuspecting creditors as the base of this hollow pyramid gets bigger and bigger.
Wikipedia lists the identifying features of a pyramid scheme:
- Products being sold having no intrinsic value or being sold out of line with its fair market value – QuadFX, R600
- Highly excited sales pitch (sometimes including props and/or promos). – PowerPoint slides, Best Premier of 2007
- Little to no information offered about the company unless an investor purchases the products and becomes a participant. AMD mum about company plans
- No product or a product being sold at a price ridiculously in excess of its real market value. As with the company, the product is vaguely described. – AMD ramps PPT slide manufacturing while real products gets pushed out.
- An income stream that chiefly depends on the commissions earned by enrolling new members (creditors, investors) or the purchase by members of products for their own use rather than sales to customers who are not participants in the scheme. – AMD borrows money, again, and again
- A tendency for only the early investors/joiners to make any real income. Hector Ruiz’ Ginormous Payslip in the midst of AMD’s massive losses.
- Assurances that it is perfectly legal to participate. – http://www.breakfree.amd.com/
Just like any pyramid scheme, the collapse of AMD's business is inevitable if it doesn't choose to re-adjust its strategy. Of course AMD isn't an illegal money making scam, but the parallels are astounding if not hilarious. It's very obvious AMD is approaching the limit of its ability to raise cash while everyone estimates the company to return to profitability sometime in 2009, which is really too long and without guarantee. After trying to borrow $3.7B within less than 6 months in order to survive, I'm beginning to doubt AMD will be around very long.
As a consolation for those that continue to follow this company, Fitch believes that in a case of bankruptcy, AMD will be re-organised rather than liquidated simply because it believes this company isn't worth much if sold piece by piece. Like I said in my previous article. If Ruiz and his posse doesn't restructure, someone else will do it for them.