This Buyout Rumor Isn't Totally Crazy

Advanced Micro Devices (Nasdaq: AMD  ) has fallen on hard times. Weak earnings reports and butter-fingered management moves hit the stock hard in recent quarters, and share prices have fallen to three-year lows, some 20% below where they started in January. In short, larger rival Intel (Nasdaq: INTC  ) is eating AMD's lunch.

But, on Wednesday, an unseen hand suddenly straightened up AMD's sagging chart. Share prices jumped as much as 11% on some noise from the rumor mill. As it turns out, the hand stretched all the way from South Korea.

Somewhere around noon on Wednesday, a rumor started making the rounds: Samsung might team up with Qualcomm (Nasdaq: QCOM  ) to place a joint buyout bid on AMD.

There's no denying that AMD looks cheap right now, so an opportunistic buyout might make sense. But why would Sammy and Qualcomm, of all outlandish combinations, be interested?

Hey, I already know that guy!
Well, Qualcomm and Samsung actually have a strong recent history of collaboration. Samsung runs one of the three processor foundries that manufacture the Snapdragon S4 mobile processor, the other ones being pure-play foundry giants Taiwan Semiconductor Manufacturing (NYSE: TSM  ) and United Microelectronics (NYSE: UMC  ) .

Manufacturing processes often need to be tailored to the precise specifications of incoming design plans, and there are always implementation problems to work through before the customer is happy. So the pair already knows how to collaborate on complex chip design issues.

Moreover, Samsung has teamed up with Qualcomm to research wireless power transmission technologies. This partnership is less of a chip play, but certainly another strong link between the two companies. And I'm sure I missed other transcontinental agreements that would further strengthen the team-up theory.

So, why would these two be interested in buying AMD together?

It's a fair question. At first glance, the company doesn't offer much in the mobile sector, where both of the proposed buyers make their hay. Instead, AMD has chosen to focus on very powerful chips for notebooks, desktops, and servers that may not meet the extreme power-efficiency needs of smartphones and tablets.

But this deal could actually make sense in the long run, kind of like the way AMD's own buyout of graphics powerhouse ATI took several years to translate into actual next-generation products. The key here is to pool the buyers' resources and manage AMD as a joint venture, lest the deal destroy the value created as AMD built a cohesive unit out of its graphics and processor assets.

What's in it for everybody?
For AMD itself, a deal like that would give it serious financial backing from two very large sugar daddies. This is very different from spinning the GlobalFoundries manufacturing unit out to investors in Abu Dhabi. That old deal split AMD in two and removed substantial assets in return for a lighter balance sheet and nimbler operations. The buyout I'm envisioning would do almost exactly the opposite, except that there's even more money flowing in.

Samsung could use a stronger presence in the crucial North American market, even if the AMD unit would focus on markets where Sammy isn't that strong. The company would love to pose a challenge to Intel on a global stage. Joining hands with Qualcomm would make the deal more likely to pass regulatory muster, since there'd be a strong American component on the buyer's side of the table.

The trickiest piece to fit into this puzzle is Qualcomm, which doesn't seem to gain anything obvious from AMD. Maybe AMD's Fusion architecture would be applicable to Qualcomm's system-on-a-chip designs, which would allow the company to bake up some unique mobile processors with specialized circuits not found anywhere else. But I'm not 100% sure whether that's technically feasible, and it's not even clear that this would gain Qualcomm a whole lot of new business anyhow.

Yea or nay, Fool?
So let's file this one under "plausible, with an asterisk." In other words, nobody will faint if the rumor comes true, but you shouldn't take out a second mortgage to invest in this buyout rumor, either.

Regardless of how this rumor pans out, the best way to beat the market is to stay informed about the stocks that matter in the industry. To help you do that, we've created a brand-new premium report on Intel. To understand the semiconductor industry, you should take a good, hard look at its beating heart, and this report even comes with a full year of updates to assist your silicon cardiology efforts. Click here to get the report right now.

Fool contributor Anders Bylund holds no position in any of the companies mentioned. Check out Anders' holdings and bio, or follow him on Twitter and Google+. The Motley Fool owns shares of Intel and Qualcomm. Motley Fool newsletter services have recommended buying shares of Intel. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinion, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


Read/Post Comments (7) | Recommend This Article (5)

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On August 09, 2012, at 12:59 PM, russfischer1013 wrote:

    Anders,

    Now you've got an interesting topic. Why hasn't SOMEONE bought AMD yet? The market cap is lunch money. AMD has no future without a big sugar daddy.

    I can think of a couple reasons why this hasn't happened yet.

    1. The wide discrepancy in fabrication technology is likely to be a large barrier to AMD success regardless of the ownership structure. I can't see ANY company catching Intel in fab technology...EVER.

    2. The Intel acquisition of McAfee with the intention of building security into the chip hardware might be a major barrier. Those Intel McAfee approaches are likely to covered by patents or copyrights. I don't think anyone in hte world wants to take on Intel in a patent battle. particularly an Asian company.

  • Report this Comment On August 09, 2012, at 1:09 PM, Mega wrote:

    I would think TXN or ARMH would be more natural acquirers of AMD.

    On the other hand, Samsung and Qualcomm have more cash burning a hole in their pocket.

  • Report this Comment On August 09, 2012, at 2:08 PM, TMFZahrim wrote:

    Personally, I've always thaught that IBM would be the best fit for AMD. See this old story for example:

    http://www.fool.com/investing/general/2008/03/18/three-more-...

    I still think IBM makes plenty of sense. Fusion/Trinity chips could score big points in purpose-built server systems, after all. But Big Blue seems pretty content with its own Power chips and imported Xeons, investing more heavily into software and services. In the end, only time will tell.

    Anders

  • Report this Comment On August 09, 2012, at 2:18 PM, winklerf wrote:

    This could be a good acquisition for the likes of Samsung and Qualcomm. I emphasize could, because it really depends upon what the objective for acquiring them is.

    There are three reasons for Samsung and Qualcomm to be interested in AMD. First, it will give them access to an x86 license if things don't go so well for the ARM architecture as the computing power of mobile devices scales up. Second, it gives them access to expertise on dealing with much more sophisticated architectures. AMD may be not competing with Intel very well with regards to architecture, but they have tried and mostly failed to do things far more sophisticated than Samsung and Qualcomm have done. Third, AMD is ahead of everyone in integrated GPUs. Getting them to help integrate graphics into Samsung and Qualcomm designs could help them to compete with nVidia as mobile graphics start to get sophisticated.

    If they view AMD just as a fixer-upper, then it is a horrible idea.

  • Report this Comment On August 09, 2012, at 6:23 PM, TEBuddy wrote:

    AMD has also tried and succeeded in doing many things more sophisticated, where even Intel has failed. Intel has only recently caught up in server processor performance per watt. People have a short memory of the long standing Opteron dominance, while Intel was intimidating, paying, or just using much more marketing dollars for people to use their chips. AMD still makes some of the most efficient purpose-use chips. Intel spent plenty of money on discrete graphics and canned it. AMD has been far ahead of Nvidia in graphics efficiency for years, and Nvidia only caught up in this respect. AMD APUs have been dominating low end Intel/Nvidia options. AMD's APUs will end up being the best chips for tablets and netbooks in the next couple years.

  • Report this Comment On August 10, 2012, at 10:39 AM, rav55 wrote:

    There several good reasons for a SAM/COMM buyout.

    The tablet is maturing into x86 performance wheelhouse. With AMD you get efficient low power x86 AND unparralled graphics. HD graphics on a tablet or Netbook.

    With x86 you get Microsoft legacy software; not so with ARMh

    With AMD you get Seamicro low power server tech, just right for running Qualcomms networks.

    The AMD licenses still hold if AMD operates as AMD regardless of who owns the company. The buyers may not get rights to x86 for there own processes but that is a fine distinction. They could simply contract with AMD for their porcess.

    I still think that Apple is the natural choice for an AMD buyout. Again because ARM is approaching the x86 wheelhouse.

    The ATI portfolio is the crown jewels here. Everything else is gravey.

    AMD has 6 billion in sales. Samsung is a leader in Tablet and phone sales.

    AMD also has a limited ARM license for a security co-processor. Samsung and Qualcomm have ARM licenses which as owners of AMD they could start fusing with an ATI design portfolio.

    An ARM APU with ATI multicore graphics could be killer in smartphones and tablets.

    It does make sense.

  • Report this Comment On August 14, 2012, at 12:33 AM, Snickersnee wrote:

    THe reason Samsung would want AMD is because of 3D.

    Right now NVIDIA has a very proprietary 3D model for desktop computers and soon to be integrated into monitors. When used with a supported game it is exceptional. Nothing like wonky movie theater 3D.

    AMD/ATI is NVIDIA's competitor in the emerging 3D space.

    Samsung has been disinclined to pay NVIDIA for the right to support NVIDIA 3D. Since this is the next "big thing" for desktops, Samsung knows they either have to meet NVIDIAs price or develop their own capacity.

    Currently Samsung has only one, outdated, monitor that support NVIDIA's 3D Vision.

    ATI is the key to future Samsung 3D monitors.

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