Sunday, July 23, 2006

AMD buying ATI ?

AMD is reported to be close to buying ATI Technologies (ATYT) for around $5 billion. I own a few ATI shares bought during the thebear-market lows of 2002-2003. I will wait for the deal confirmation to mark this as a hit.

Nvidia and ATI are the number one and two, and the only major players in the graphics chips business. Nvidia, being the high-end leader, would not have sold itself to AMD, still not a premium name.

Does this buy make sense for AMD ? No, atleast not in the short run. AMD would have been better off concentrating on the high-margin enterprise/server market. This buy indicates that it is looking to gain strength in the consumer/media PC sector as well. Given AMD's not-so-sound financial situation, this buy will likely lead to a credit downgrade, making it harder to raise additional funding in the future. As it is, AMD is so low on cash that the ATI buy will likely be a stock-swap, with little or no cash part.

AMD should have gone for a smaller buy, like Transmeta (TMTA), whose power-saving technology could be put to even better use in server farms.

AMD may still come out ahead after a few years, if it is able to push in both the server and consumer markets without losing grip on either. But it is a big risk to take right now.

This buy will also put some pressure on Intel to go after Nvidia, but it won't do so until it first fixes its internal turmoil. Having just offloaded some of its business to Marvell (buying from a desperate seller, that looked like a good deal for Marvell), the last thing Intel should be doing is to get into another sector so soon. I listed more probable targets for Intel in an earlier post.

We may now be entering the long overdue consolidation phase in the semiconductor sector. There are way too many companies that are barely standing, with their stocks trading at close to book/cash value. We should see a few of them getting taken out over the next few months.

Two targets worth watching - Analog Devices (ADI), long rumored to be a target for someone like Texas Instruments, and PortalPlayer (PLAY), a chip maker for iPods that got hit when Apple decided to switch.

I own a large number of AMD shares bought at a price close to 40% below the current price. If the market overreacts on the down side, I would like to add more to my position. This will be a long-term bet - 3-5 years. With Dell now carrying AMD machines, there is a good chance that its market share will see a significant boost.

I also own a few Transmeta shares which have recently seen a bounce due to rumors about deals with Sony and Microsoft for their upcoming products. I would rate it speculative, but for those with an appetite for risk, it is still worth considering.

I do not own shares of Analog Devices, but it is a stable, low-risk buy. It also has a 2% dividend, with room for more hikes. I will be looking to open a position soon. PortalPlayer is speculative because of its over-dependence on the iPod market, but it is working on getting into other areas/devices, and could see substantial gains if it is able to implement a new strategy successfully. I do not own shares, though I have come close to buying a few times.


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