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AMD as a Takeover Target?

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By mjuarez
June 30, 2003

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Grunchy said in another thread:

Therefore my gut feeling, AMD is a takeover target by IBM.

I think someone else also mentioned that the work IBM and AMD are doing at the Fishkill facility is a good "first step" for an eventual merger/acquisition. And it got me thinking.

First place, it would seem to me a bit far-fetched that IBM was really interested in acquiring AMD. Although they would benefit from AMD's IP portfolio and semiconductor expertise and engineers, not to say two fabs, I doubt that IBM is interested in confronting Intel head-to-head. They are much more comfortable, IMHO, in their actual position, simply building servers out of the best components out there, all the while bundling them with IBM services and maintenance, and making loads of money at it.

But, for discussion's sake, and despite the above, let's assume IBM is indeed interested in acquiring AMD. In that case, what happens to us as shareholders? I can't help but draw parallels to the somewhat recent acquisition of PayPal by EBay. PayPal was the dominant company in its area, it had much of the same network effect that EBay benefits from, generated 60% of its revenue from payments done at EBay, and was already expanding into some other markets.

Being a dot.com, the company had been losing money for quite some time. But just last year, when the company started churning out profits, and everything looked bright ahead, EBay swooped down and bought them outright. In the end, I was left with the impression that most individual PayPal shareholders were not very happy about the purchase, even though they got an 18% premium over market price. They believed that the company had the potential to grow a lot more independently, instead of operating under EBay.

When you compare it to AMD, it goes something like this: AMD has been generating losses for as soon as I can remember, always trying to play catch-up with Intel, and most of the time, losing badly. It has barely managed to survive to this day. The following chart is testament to this.

While AMD's market cap is a little bit less than it was in 1986, Intel is worth roughly 50 times more. It definitely hasn't been a field day for AMD. And yet, it has stayed the course, capturing to date about 15% of the worldwide processor market. Not bad for a company which can only spend 10% as much as Intel on R&D.

Today, I believe that for the first time in all of AMD's history, they have a product, which is technically superior to Intel's best offering in a lot of aspects, and also offers the most bang for the buck to customers. It also appears that, at least for the foreseeable future, Intel will have no directly competing product. In a way, AMD is creating a market for itself with AMD64, which if played correctly, could turn out to be huge.

At this point, AMD has the possibility to really break from the vicious cycle of "If you lose, you're out; if you win, you get to play again". It actually has the possibility to generate profits in the future.

I, for one, would be very disappointed if there was a press release tomorrow saying IBM will buy AMD, even if it was at a 100% premium to today's prices. I believe there is much more potential value in AMD as an independent company.

Just my thoughts.

Marcos


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