AMD: Barcelona or Bust

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Poorly Timed Acquisition?

Will Barcelona be enough to stem the tide? Doug Freedman at American Technology Research in San Francisco doesn't think so. The server business in particular, where AMD has performed so well in the last two years, is under pressure. "You can't bet on Barcelona fixing the cash-flow problem," he says. "It may turn out that 2008 is a better year than 2007 for server sales, but even so it's looking like there's going to be below-average unit growth in the sale of servers, which will make the market-share battle with Intel all that much more aggressive."

As of the end of 2006, AMD had been holding its own against Intel in the market-share race, according to Mercury Research figures. Its share of the combined market for PCs, notebooks, and servers at the close of the fourth quarter stood at 25.3%, up from 23.3% in the third quarter and 21.4% in the fourth quarter of 2005. Intel's share, meanwhile, has been slipping from 76% in the third quarter to 74.4% at the end of the fourth.

But there's more trouble at AMD this time around. The company is just coming off its acquisition of the graphics chipmaker ATI Technologies for $5.4 billion in cash and stock. In hindsight, the deal may have been poorly timed.

"Strategically, the timing was necessary to do the ATI deal," Freedman says. "But I would have liked to have seen a deal with ATI done on different terms. We very often see deals that involved technology transfers and licensing deals that are far less capital-intensive. I would have preferred to see AMD do a deal with ATI that involved far less cash than it did."

Cloudy Skies Ahead

And cash appears to be a looming problem at AMD, according to a research note put out by Chris Caso, analyst at Friedman Billings Ramsey. "We think AMD's announced capital restructuring is borne from necessity; despite its reduced capital expenditure plans and expense reductions, its current operating performance leads us to believe a cash crisis is looming for the company," Caso wrote. He expects AMD to burn $1.5 billion in cash this year, compared with an earlier forecast of $1.2 billion. "Intel's expected price cuts in the third quarter are also likely to mute the effect of AMD's upcoming Barcelona launch, which would have represented the best case for an improvement this year," Caso added.

Adding to the bleak picture, AMD may not be getting as much of a lift as it had banked on from a hard-won contract to supply chips to Dell (DELL), Kumar says. "Dell has its own structural and tactical issues," he says. "It doesn't sell in the retail market, and it's not well-exposed to developing markets, where the growth in the PC business is taking place. Working with Dell is not turning out to be the nirvana that AMD had hoped for."

In its favor, AMD may be able to offset any cash problem by raising capital, Kumar says. "The world right now is awash in liquidity," he says. "Yes the balance sheet is stressed, but if AMD had to do another capital raise it could probably get it. There's only two players left in this market, and the risk of a new entrant is virtually zero. That limits the risk to execution alone."

And AMD is hoping Barcelona puts limits on a host of other risks.

Hesseldahl is a reporter for BusinessWeek.com.