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December 06, 2005
Spansion: A Difficult Road Ahead?
Today, MarketWatch reported that Spansion, the flash memory business of AMD, will price its IPO next week. What I can't understand is why. Why now, that is. Sure, I know that AMD wants to get rid of Spansion, which is dragging down its financials, as soon as possible. But this might not be a good time, by any stretch.
First, today's announcement by rival flash memory makers Intel and STMicro to manufacture compatible memory is hardly good news for Spansion. Basically, it means that customers of Intel and STMicro will now have a second supplier to rely on during chip shortages. Spansion's customers won't have a second source supplier. And that could make some customers decide to go to Intel and STMicroelectronics instead of Spansion, says Mark DeVoss, an analyst with iSuppli.
There are other reasons why, I think this IPO won't do well.
Reason No. 2: While the flash memory market Spansion is in has recovered slightly in the past few months, it's barely growing -- we are talking mid-single digits. With that growth rate in mind, I have trouble figuring out how Spansion can turn its losses (a $50 million loss in the third quarter alone) into profits. Why would anyone want to buy into an IPO of a company that might keep on bleeding money for years?
Furthermore, when Spansion is separated from AMD, analysts expect Spansion's credit rating to be cut. And Peter Hofstra, an analyst with AIC funds, estimates that then (actually, even assuming that Spansion's credit rating remains the same), Spansion might even have trouble covering its interest expense, Hofstra estimates.
Sure, AMD wants to get rid of Spansion. But the fact is, it might make more sense for AMD to hold on to Spansion and try to turn it around, instead of throwing away a business at the worst possible moment. After all, when you are throwing something away, you are not expecting to get any money for it.
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