In a consolidation that will at least reduce the number of confusing ticker symbols (Ticker ATI belongs to Allegheny Technologies), chipmaker Advanced Micro Devices Inc. (NYSE:AMD) will buy graphics chipmaker ATI (ATYT) for $4.2 billion in cash and $1.2 billion in stock. Our initial thoughts were as follows:
1) Why didn’t they do this four months ago, when $1.2 billion in stock would have amounted to half the number of shares? ATI’s share price has been essentially unchanged in that time, and the rumors of a merger have swirled for years.
2) AMD doesn’t have $4.2 billion in cash. They have roughly $2.5 billion as of the latest quarter-end (less than they had the previous quarter). Some of that will be needed for day-to-day business operations, but we can assume that the $500 million ATI carries will suffice for that, leaving the whole $2.6 billion available for the buy. Still, that means ATI will need to issue $1.6 billion in debt to complete the merger.
Then we read the New York Times story on the deal, where we learned that this is “a transaction that will reshape the semiconductor industry.” Really? The two together account for $8.4 billion in revenues, approximately 3.6% of the semiconductor industry’s revenues over the last year. The industry is not being reshaped so much as rearranged. The article continues:
“The deal puts A.M.D. on more equal footing with Intel,” said Samir Bhavnani, director of research at Current Analysis, a market research firm in San Diego. “It completes the puzzle for A.M.D.”
He said the deal was important because it took A.M.D. beyond PC’s and gave it greater strength for the cellphone and handheld markets.
You mean the cellphone and handheld markets that Intel had to exit recently (so to speak)? Hardly a ringing endorsement. And as far as “equal footing,” we don’t see how $8.4 billion in revenues, no cash and $1.6 billion in debt is “equal” to $37 billion in revenue, $8 billion in cash and no debt.
Yes, the deal makes it easier for the two to jointly develop high-end graphics processing capability on a microprocessor, or as AMD put it in the press release:
AMD’s acquisition of ATI will position the new company to deliver innovations that fulfill the increasing demand for more integrated solutions in key market segments while also continuing to develop “best-of-breed” discrete products that empower customers to choose the combination of technologies that best serves their needs.
But in order to achieve this, AMD is taking on $1.6 billion of debt that it may not be able to service. Over the last three years, according to Yahoo! Finance, AMD’s free cash flow was as follows:
So a company that has been unable to generate enough cash to fund its own investments (ATI’s $50 million in annual cash flow will only help a little) and continues to invest in massive new projects is taking on $1.6 billion in debt at a time when price competition looks likely to take a big cut out of their existing cash flows.
It just doesn’t add up for us.
See also: AMD's ATI Purchase Means an Edge Against Intel
AMD 1-yr chart: