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AMD: Is Move Into ARM Chips Positioning It For Sale?

This article is more than 10 years old.

Advanced Micro Devices this week announced a plan to begin developing ARM-based processors targeted at the server market, in an attempt to diversify away from the core battle with Intel for the x86 PC processor market. That's an interesting move, but one which might have deeper implications than simply trying to evade its eternal tormentor.

UBS analyst Steve Eliscu thinks the odds are against widespread success for AMD in ARM server chips. "AMD will be challenged to compete vs the existing ARM-based suppliers, especially those who have an architectural license and can best optimize for performance and power consumption," he writes in a research note this morning. "However, we believe AMD’s shift towards ARM better positions it to be sold at some point in the future to a leading ARM processor vendor. While few would dare compete vs Intel in x86, AMD offers an existing ARM supplier thousands of engineers that could provide it a huge boost."

In a sense, he's arguing that that AMD would be a good target for an "acqui-hire" deal for a company in the chip business that wanted a ready stable of experienced microprocessor engineers. And as it turns out, there are some additional goodies hidden in AMD as well.

Eliscu asserts that an AMD buyer would get some useful assets that could justify a "significant premium" to its current enterprise value:

  • A big design team, including thousands of engineers. Broadcom picked up 250 engineers in paying $3.7 billion for NetLogic, he notes. "Possible buyers of AMD could include: a major Korean semiconductor maker to augment its processor development efforts; Apple, which in addition to processors could also vertically integrate in graphics; Qualcomm, which would have better capability to provide processors for PC clients and servers/communications infrastructure," he writes.
  • Graphics: He thinks the graphics unit could be worth $2 billion or more to Intel. "If Intel made AMD-designed discrete graphics chips in its most advanced manufacturing facilities, Intel would potentially be able to create a much more profitable discrete graphics business than AMD has," he writes. "We would expect Intel to focus on the premium segment of the market, including the professional graphics business, which NVIDIA currently dominates."
  • Embedded processors, in particular for game consoles: "Market speculation suggests AMD has swept design wins in all of the three major console platforms – Microsoft, Nintendo and Sony, each of which would result in a either IP and/or silicon sales," he writes. "  If we estimate the business will be sustained at $500 million/year, given the low-opex intensity of the business on a go forward basis, even a blended 30% gross margin business could yield operating margins in excess of 20% or $100 million/year. If we assume a 7-year product life-cycle, this would result in a pre-tax present value of $500 million.
  • Patents: He notes that AMD has over 4,400 non-expired patents, which he thinks could be worth somewhere between $1 billion to $2.1 billion, depending on what comparable transaction you use.
  • Net operating loss carryforwards of nearly $1 billion.

"While the price highly depends on the buyer, we believe AMD offers enough value to justify a 100% premium to its current $2.2 billion enterprise value, an offer that we believe the board would need to strongly consider," he writes.

Eliscu keeps his Neutral rating and $2.75 price target on the stock.

AMD is up a penny this morning to $2.15.