The Other Side To The AMD Deal

There are inherent problems with the Abu Dhabi/AMD deal, but they’ll happen later rather than sooner, and maybe not at all.

Before we look into the problems with the AMD-Abu Dhabi, we should quickly go over why AMD needed this deal and why certain “problems” really aren’t problems. 

Prior to this deal, AMD had two huge problems. 

1) Its products have been uncompetitive and unprofitable for a while and

2) Because of that unprofitability combined with its $5 billion + debt, it was going to be unable to get the billions it needed to update its fab capacity to stay competitive with Intel, even if their financial situation improved and they got to break even or a little better shortly.  That was the case even before the financial crisis, never mind now.  AMD’s debt problem was never one of not having the money to pay the interest on its (long-term) debt, but being unable to borrow what it needed to have for the future.  AMD essentially maxed out its credit cards, and couldn’t get any more credit or cards to pay for what they needed to have to stay in business for the future. 

The Abu Dhabi deal takes care of the second problem.   At a minimum, AMD will get its 32nm fab without having to directly pay for it, and perhaps a good deal more.  It also gains a financial backer in case things get really recessionary the next couple years.  

While the Abu Dhabi deal doesn’t really help AMD’s first problem, that problem is less severe than it was even six months ago, and should slowly improve even more going into 2009.  Unless this recession is really bad, AMD should be moving into a period where it more-or-less breaks even.  It might make a little, more likely it will lose a little, but it won’t be bleeding lots of red ink, and with the billion it will get as a result of this deal, it shouldn’t be in any danger of running out of money any time soon.     

So the company will get to live and fight another day, which under the circumstances is a pretty big achievement.  I’ll put it this way, if this deal didn’t happen, AMD would have to have been bailed out in similar fashion by somebody else, or it would have most likely died, perhaps quickly, more likely they would have withered away slowly: reneging on the New York State deal, being forced into a cash-and-carry foundry relationship with IBM for 32nm which would have been more disadvantageous than they’ll get from this new entity, many more layoffs, a probable death spiral.  Even if the Intel litigation worked out well, AMD would have probably not been in any shape to take real advantage of it.    

Some will say that this transaction will leave AMD in effective control of the Abu Dhabians.  That’s technically arguable now, but eventually, that will end up being the case.  But this deal will not be blocked by anybody, simply because nobody else wants this company (at least on these kind of terms), so blocking the deal means dooming the company. 

Some AMD short-sellers (quite literally Yahoos posting on the Yahoo stock message board, and I’m sure others), are proving Samuel Johnson’s dictum that patriotism is the last refuge of a scoundrel by wrapping themselves around the U.S. flag and claiming that this deal is practically a sale to Al Queda.  The reality is that terrorists don’t use nor need CPUs in their typical devices, and it would be a lot cheaper to buy whatever is needed through third party computer stores than buying a CPU company.   

So there will be some noise, but this will not be blocked. 

Intel is beginning to make some nasty noises about the deal, but don’t take them all too seriously.  l’m sure this will give their retained lawyers and lobbyists something to do, and they’re going to want something to “let” this deal go through.  However, when your antitrust defense teams are present in almost as many countries as your products, and the European Commission is figuring out how much to fine you, seriously trying to knock AMD out of the CPU market based on a minor clause in a contract isn’t neither politically astute nor likely.  

To make what will be a long story short, there will be all kinds of legal theater and dire threats, but in the end, a new patent swap agreement will be negotiated that will eliminate these pesky ownership clauses in return for something Intel wants, perhaps an out-of-court settlement on this antitrust suit.   

With all that said, what’s the problem?     

The long-term problem is simple to describe, difficult to avoid, probably impossible to permanently solve: how do you split the pie between the creators and the makers at any time, and particularly when at least initially, there is little to no pie to cut up?  

Oddly enough, the lack of AMD pie is probably an advantage at this point.  There’s really no pie to argue about, and no one can reasonably expect to make any money from this deal for a couple years.

Eventually, though, AMD is going to have to become much more profitable than it ever has before to make their new partners happy.  It’s going to have to grow the pie big enough so that it can happily feed two companies rather than one.  Read between the lines of the execs talking about this deal, and there seems to be a working assumption that Intel is going to have its competitive wings clipped in due course.  But that’s not going to happen for a while.

No, the inherent problem to this deal will only emerge a few years down the road.  If AMD’s products don’t make enough profits by then, that will obviously be a big problem.  If Intel emerges relatively unscathed from the AMD litigation, that will make high AMD profits rather less likely.  If AMD tries to grab a lot more marketshare against an unmuzzled Intel, they’ll be in better shape to do that, but it will probably reduce the profitability of the CPU industry permanently.  Even if AMD is successful, it’s unlikely that they’ll be so successful that splitting the profits between the two parties will become a joyous rather than contentious event.  

So there will be problems, probably big problems, down the road, unless, of course, that AMD-Intel patent swap agreement gets renewed without those pesky change-of-control provisions, in which case the Abu Dhabi folks buy AMD lock-stock-and-barrel and end the discussion.  You see, maybe this isn’t too big a problem after all. 

Does this mean AMD is going to stop being an “American” company?  Probably, but just how “American” is a company that does the vast majority of its production outside the United States? When the choice is between being a live “Arabic” company or a dead American one, what’s better?  When the ship has sunk, and you’ve been in the water for a while and can’t stay up much longer, and somebody tosses you a life preserver, you don’t look at the country of origin tag and say, “I’m not using this, I’m going to hold out for one made in the USA?”  No, you grab it for all it’s worth and you worry about later, later.      


About Ed Stroligo 95 Articles
Ed Stroligo was one of the founders of in 1998. He wrote hundreds of editorials analyzing the tech industry and computer hardware. After 10+ years of contributing, Ed retired from writing in 2009.

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