AMD Takeover at Three Times Chip Premium Stifles Bids: Real M&A
While Advanced Micro Devices Inc.’s management vacuum is fueling speculation of a takeover, a possible price tag of three times the average premium for semiconductor makers may deter any acquirers.
AMD, whose chief executive officer resigned last month, has gained 9.1 percent since two more departures announced on Feb. 9 reignited bets the second-largest maker of processors for personal computers is vulnerable to a takeover. Acquirers of chipmakers in the past five years offered a median of 14.5 times earnings before interest, taxes, depreciation and amortization, according to data compiled by Bloomberg that includes net debt. That would value AMD’s equity at $12.8 billion, 120 percent higher than its price the past 20 days. The average premium for chipmaker deals since 2006 is 35 percent.
Buying AMD at that level would cost more than has been spent in all semiconductor takeovers combined in the past four years for a company that has reported only five years of profits since 2000. Slower than forecast growth in personal computer shipments and the prospect of taking on Intel Corp. would likely discourage the few companies capable of footing the bill -- Qualcomm Inc., Texas Instruments Inc. and Samsung Electronics Co. -- according to Williams Financial Group’s Cody Acree.
“You run out of people very quickly that would have the wherewithal and the attraction for the company,” the Dallas- based analyst said. “I can’t think of a chip company of any size wanting to get into that business.”
“We don’t comment on rumor or speculation,” said Drew Prairie, a spokesman for Sunnyvale, California-based AMD. “We remain focused on executing our growth plans that take advantage of the strongest, most differentiated products and technologies we’ve had in our 40-year history.”
AMD’s $6.2 billion of losses since 2000 and the company’s struggle to win market share from Intel haven’t made its stock cheap relative to its rivals.
While AMD’s shares have retreated 78 percent during the past five years, the worst performance among 76 companies in the Standard & Poor’s 500 Information Technology Index, they’re still more expensive relative to earnings than about three- fourths of its global rivals, data compiled by Bloomberg show.
AMD’s valuation of 28.1 times reported earnings is almost three times the 10.6 ratio for Intel, the world’s largest semiconductor maker.
Shares of AMD have rebounded 9.9 percent this year even as Chief Executive Officer Dirk Meyer resigned Jan. 10 after a dispute with the board over how to invigorate server sales and gain ground in mobile computing. Chief Operating Officer Robert Rivet, who joined AMD as chief financial officer in 2000, stepped down last week, while Marty Seyer, senior vice president for corporate strategy, is also leaving the company.
CFO Thomas Seifert, AMD’s interim CEO, has said he doesn’t want the promotion to be permanent.
“There is no management team there,” Patrick Wang, an analyst at Wedbush Securities in New York, said this week. There is some “chatter” that the company is up for sale, he said. “It’s a far-fetched possibility.”
At the median takeover multiple in deals for U.S. semiconductor components and electronic components companies during the past five years, AMD would have a per-share price of $17.86, data compiled by Bloomberg show. That would value the company at $13.4 billion including net debt, compared with the $11.4 billion worth of takeovers in the industry since 2007.
Freescale Semiconductor Inc., the largest supplier of chips to the U.S. automobile industry, was taken private in December 2006 by New York-based Blackstone Group LP, Carlyle Group of Washington, Permira Advisers LLP in London and Fort Worth, Texas-based TPG Capital in a leveraged buyout with an announced equity value of $17.6 billion.
The Austin, Texas-based chipmaker is planning a $1.15 billion initial public offering to help pay down debt and capital lease obligations of $7.62 billion, according to a filing with the U.S. Securities and Exchange Commission.
AMD’s borrowings may deter private equity firms from considering a takeover, according to Williams Financial’s Acree.
While chip companies often carry little debt as the cyclical nature of their business can make regular repayments difficult to maintain, AMD’s debt-to-Ebitda ratio of 2.6 is the sixth-highest of 50 global semiconductor companies, data compiled by Bloomberg show.
Company Credit Ratings
If AMD’s long-term liabilities of $2.65 billion including operating leases were to double in a leveraged buyout by private equity firms, its credit rating would fall three levels to B2L, or three steps below investment grade, according to Bloomberg’s Company Credit Ratings. The model analyzes borrowers based on their indebtedness, market capitalization, stock volatility, profitability and other financial ratios.
“I just don’t see a natural buyer for AMD,” said Mark Bronzo, who helps oversee $25 billion for Security Global Investors in Irvington, New York. “AMD has a lot of cash, but it also has high levels of debt. That makes it hard to believe that someone would pay a significant premium.”
Options traders are betting AMD will keep rallying. The number of outstanding calls to buy has jumped 64 percent since last month’s expiration of contracts as puts to sell rose 24 percent. That pushed the ratio of puts to calls down to 0.46-to- 1, the lowest level since July.
U.S. technology companies are also sitting on at least $245 billion in cash that may be used for acquisitions, data compiled by Bloomberg show.
Qualcomm has $4.7 billion in cash and equivalents, along with $14.4 billion in marketable securities. Texas Instruments has $1.3 billion in cash and equivalents, the data show.
Kim Morgan, a spokeswoman for Dallas-based Texas Instruments, declined to comment on takeover speculation. Emily Kilpatrick, a spokeswoman for San Diego-based Qualcomm, also declined to comment. Suwon, South Korea-based Samsung’s James Chung and Chenny Kim didn’t immediately respond to phone calls.
AMD’s purchase of Markham, Ontario-based ATI Technologies Inc. for about $5 billion in 2006, which increased its debt, is now beginning to pay off, according to Wedbush’s Wang. By combining graphics capabilities into computer microprocessors, AMD is poised to win orders with its so-called Fusion parts.
“You’d want them for the Fusion technology,” he said. “It’s taken them five years to get it together.”
While the technology may make AMD more competitive against Intel, it’s not enough to lure another company into a battle with the Santa Clara, California-based chipmaker, Wang said.
Companies that use or may use AMD’s chips, such as Dell Inc. of Round Rock, Texas; Palo Alto, California-based Hewlett- Packard Co.; International Business Machines Corp. in Armonk, New York; and Redwood City, California-based Oracle Corp., aren’t likely to covet the chipmaker because competitors would immediately stop ordering from AMD if they bought it, he said.
AMD has less than 20 percent of the global personal- computer processor market, compared with Intel’s 80 percent. Sales of $6.5 billion last year trailed Intel’s $43.6 billion.
Global PC shipments rose 3.1 percent last quarter, missing projections for 4.8 percent growth, according to research firm Gartner Inc. Shipments in the U.S. fell 6.6 percent, Stamford, Connecticut-based Gartner said last month.
A prospective owner of AMD would have to win over the government of Abu Dhabi, its largest shareholder with a 16 percent stake. AMD is the biggest customer of Globalfoundries Inc., a maker of chips that is owned by Abu Dhabi.
Kate Triggs, a spokeswoman for Mubadala Development Co., the government-owned investment arm of Abu Dhabi, didn’t immediately return phone calls or e-mail seeking comment.
Elsewhere in mergers and acquisitions, Clariant AG agreed to buy private equity-owned Sued-Chemie AG for 1.4 billion euros ($1.9 billion) in cash and stock to expand in chemical catalysts used in the oil and automotive industries.
The Swiss maker of plastic additives will acquire a 50.4 percent stake from One Equity Partners LLC, New York-based JPMorgan Chase & Co.’s buyout arm, and has agreed to buy shares from family investors to take its stake to “slightly above” 95 percent, Muttenz, Switzerland-based Clariant said in a statement yesterday.
An Abu Dhabi holding company agreed to take control of Cia. Espanola de Petroleos SA, Spain’s second-largest oil company, through a 5.2 billion-euro offer including net debt that will buy out Cepsa shareholder Total SA.
International Petroleum Investment Co., owned by the Abu Dhabi state, agreed to buy the French oil company’s 48.8 percent stake and bid for the remaining Cepsa stock at 28 euros a share in cash, IPIC said in a regulatory filing. The company already has a 47 percent holding.
There have been 3,036 deals announced globally this year, totaling $269.8 billion, a 28 percent increase from the $210.8 billion in the same period in 2010, according to data compiled by Bloomberg.