Microsoft’s AMD Buyout Unlikely as Stock Drops 7%

Shares in chip maker AMD have dropped by 15 cents (7%) to $1.86, marking a huge decline following its 9% gain in the wake of rumours of a buyout by Microsoft. The sudden fall in stock prices in conjunction with the buyout rumours makes any potential purchase by Microsoft unlikely, with Citigroup analyst Chris Danely saying, “we seriously doubt it.”

On Friday, Fuad Abazovic of Fudzilla cited anonymous “industry sources” attesting that “Microsoft is seriously talking to AMD about buying the chipmaker,” apparently motivated by a desire to gain full control over the microprocessor that powers its Xbox One console.

Danely, however, points to a number of hurdles that make a Microsoft purchase of AMD unfeasible. “Microsoft collaborates heavily with Intel in OS development and PC platform standards (bios, firmware, drivers, etc.),” Danely said. “Also, AMD’s core microprocessor business (roughly 30% of sales) continues to lose share and money. We note any company that acquires AMD will need to renegotiate the x86 cross-licensing agreement with Intel – a cumbersome process, in our view.”

He caveats that, though, by saying that Microsoft could conceivably gain control over parts of AMD, such as the semi-custom business that builds the Xbox chips.  “We could envision a scenario in which Microsoft acquires AMD’s semi-custom processor businesses (roughly 37% of 2Q15 sales) although we believe it is unlikely AMD would sell its semi-custom business given it’s the only major business that is profitable for them.”

“Microsoft already utilizes AMD’s semi-custom processor in its XBOX One console, and the semi-custom business is AMD’s most profitable product line with mid-teens operating margins,” Donely added. “The biggest complication here would be a potential conflict of interest as AMD also provides semi-custom silicon into the competing Sony Playstation 4 console”

“Microsoft could also be interested in acquiring AMD’s graphics business (roughly 12% of 2Q15 sales). Although AMD’s GPU unit share has declined almost 50% over the last 5 years from 51.1% 2Q10 in to just 26.9% in 2Q15, we believe the former ATI graphics division still has valuable IP as it relates to Microsoft’s efforts in PC gaming and virtual reality. Microsoft recently announced its own virtual reality headset, HoloLens.”

Thank you Barron’s for providing us with this information.

Image courtesy of TechWeek Europe.