AMD plans to seek the right to double the number of common shares outstanding at its next annual stockholders’ meeting.
Why do companies do that? When companies do that, they issue more shares in the company, sell them, and use the money for company activities: buying other companies, expanding company activities, or paying off the debts of the company.
Generally, companies need the permission of the shareholders to do this because issuing more shares dilutes the ownership interest of existing shareholders.
Let’s say you buy a pizza parlor all by yourself for a million dollars, and you issue a hundred thousand shares of the company to yourself. Since you’re the sole owner, you get all the profits.
One day, you decide to get a partner, and you decide to issue another hundred thousand shares of the stock to him for half the business for X amount of money. From that point on, you no longer get all the profits from the business, but just half of them.
That isn’t necessarily a bad thing if the money you got for your 50% of the business went into expanding the business and profits jumped up a lot. For instance, if the pizza parlor was making $100,000 in profit before the sale, but started making $300,000 in profits after expansion, you’re making more money with 50% of the business than you did previously with 100%.
On the other hand, if the expanded pizza parlor only makes $150,000 in profits, you’re making less money after the sale than before.
A big factor in whether or not dilution is a good idea is the price someone wants to pay for a share of the business. Paying a high price is a lot better than paying a low price, since it raises a lot more money for the company, or, you have to sell much less of your part of the business to raise X amount of money.
AMD has been on a spending spree lately. It spent a few billion building Fab 36, it will spend a couple billion more renovating Fab 30, it took an option to spend a few billion more on a fab in New York State in a few years, plus it spent over $5 billion buying ATI.
A great deal of this spending has come from loans and emptying whatever piggy bank AMD had. This has left AMD not only heavily indebted, but also faced with big bills for the next few years from fab-building.
This would be no big deal if AMD were making a lot of money, but so far, all the money spent hasn’t increased profits to pay for the extra debt. Indeed, most believe AMD will lose money for at least the next few quarters.
This would be no big deal if people were willing to keep lending AMD billions more, but most of AMD’s debt is pretty creatively-financed already. When you owe a lot of money, people generally don’t want to lend you a lot more unless they’re really sure you can pay them back, and AMD doesn’t exactly have a track record of making big profits.
Stock analysts have been saying recently that AMD was likely to run out of money with their current spending plans unless they either cut back on their plans, or got more money from the stock market. This move on AMD’s part is the first step to doing the latter.
Much of any money raised in a stock sale will go to pay off recent debt, indeed, for some of the more recent loans AMD got, it’s a requirement of the loan that AMD use some of that money to pay back the loan.
There’s nothing wrong with that, but that raises another big problem with AMD: How much money can they expect to get from the sale?
The price of AMD’s stock has dropped from a bit over $40 to a bit under $15 in the last year. (A year ago was when they should have done this, they would have gotten a lot more money for a lot fewer shares in a much more positive environment. But they didn’t, and the stock tanked.) When the market gives you that kind of thumbs down on your existing stock, it’s not exactly the best time to offer them more. That will put a lot of downward pressure on AMD stock, and make unhappy shareholders even more unhappy. It’s like AMD went on a spending spree, and now they’re going to have to pay for it with the dilution of the value of their stock.
The American stock market had a pretty bad week this week. If this week’s declines continue, that will make matters even worse for AMD.
Then again, AMD isn’t going to be selling these shares on Monday, or any other day of the week any time soon. The earliest this could happen is May, and AMD will have some say in the precise timing of the offer. Maybe they’ll release a lot of good K8L news, then try.
The stockholders could reject the proposal, but if they did, where does AMD go from there? They would have to greatly reduce their expenses on fabs, and that’s not viable. So the stockholders will approve simply because they have no real choice.
Finally, there have been continuing rumors about AMD being bought out by some (unknown) somebody or something. In their statement, AMD made a fairly odd comment:
“Although the issuance of additional shares of Common Stock could, in certain instances, discourage an attempt by another person or entity to acquire control of us, we have not proposed the increase in the number of authorized shares of common stock with the intention of using the additional authorized shares for anti-takeover purposes.”
Well, in this instance I don’t doubt that AMD isn’t doing this to keep a suitor away; they’re doing it because they need the money. If there really is a Prince Charming around, though, doubling the number of shares is effectively an anti-takeover move, so this move is Hectorella telling Prince Charming “Hurry up, I can’t wait.”
What do I think? I don’t believe in Prince Charming. I do think AMD will get its vote, and issue the shares, but it won’t be pretty. Finally, I think the AMD execs will survive this, but the clock is going to start ticking on Hector and Co.. If they don’t produce serious results in 12-18 months or so, they’re going to be history.