According to technology news website Fudzilla, struggling chipmaker Advanced Micro Devices (NASDAQ:AMD) is ready to sell a 20% stake in itself to private equity firm Silver Lake Partners. Based on AMD's current share price, this works out to an investment worth approximately $300 million as of writing.
If this report is true, what might it mean for AMD's business and ultimately its share price? Let's take a closer look.
AMD could definitely use the cash
In an article recently published on Fool.com, in which I outlined three reasons why I didn't plan to invest in AMD stock now, I noted that AMD's balance sheet -- particularly in light of the fact that the company continues to burn cash -- is in a precarious position.
By the end of the quarter, should it meet the guidance that it set forth at its most recent earnings release, AMD will see its cash balance drop to $700 million. This is just $100 million above the company's "target minimum" cash balance of $600 million. A few more rough quarters (and I don't see much on the horizon to suggest that things will get any better for the company over the next several quarters), and the company could find its cash balance below this "target minimum."
A $300 million cash infusion for AMD, although not a fundamental game changer for the company, might allow it to last long enough to figure out a new, more effective business strategy.
Near-term impact on the share price
If the report of this investment in AMD by Silver Lake is true, the odds seem good that the share price could see a material move up following an announcement. Although such a deal would very likely dilute existing AMD shareholders, the financial situation at AMD appears so precarious that investors might look favorably on the improved liquidity that such an investment would mean for AMD.
Potential long-term impact on the business
If a private equity firm like Silver Lake were to take a substantial stake in AMD, my guess is that the private equity firm's chief focus would be on trying to restructure the business so that it is consistently profitable/cash flow positive.
For example, it's pretty well known that AMD is trying to push into a lot of different markets, despite its limited resources. Perhaps with a large enough stake, Silver Lake could force management's hand in winding down certain product lines/product segments to cut costs and pushing the company to focus only on a limited set of opportunities with attractive risk/reward ratios.
Indeed, the Fudzilla article states that it has heard that AMD is set to perform yet another round of restructuring. This should mean additional cost cutting to better align AMD's operating expenses with its current revenue run rate.
This could be very interesting for AMD, if true
One of the things that has been very unattractive about the AMD story is that the company seems to want to participate in a broad array of markets with fairly limited resources. This allows it to stand up and tell its investors that it's going after a huge total addressable market, but because AMD is trying to do so much with so little, it has been unsuccessful at competing with some of its larger and/or more focused rivals.
If Silver Lake comes in, gives AMD this rumored cash infusion, and essentially forces the company to become a leaner, more focused specialty chipmaker, then there could be some real value to be unlocked here over the long term -- even if AMD ultimately can't advertise as large of a total addressable market.
Ashraf Eassa has no position in any stocks mentioned, and neither does The Motley Fool. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.