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Could Or Should AMD Go Private?

AMD's latest warning on Monday of a sales shortfall and a cut in capital expenditures is sure to give new legs to months-old rumors that a private equity venture firm might swoop in and take the struggling chip maker private.

AMD  is certainly having a rough go. It's already issued one warning and its stock has plunged from $34 to $13 in the course of one year. AMD's assets are up, but so is its long-term debt, by $2.6 billion, thanks to the $5.4 billion merger with ATI last year.

Plus, it's in a long-standing price brawl with a much bigger and more liquid nemesis, Intel , and things are getting slow in the chips biz. Worldwide sales of semiconductors in February fell 6.5 percent from the previous month, to $20.09 billion, although February 2007 sales were up 4.2 percent from the $19.28 billion in February 2006, according to the Semiconductor Industry Association.

“While seasonality clearly contributed to the 6.5 percent decline in worldwide chip sales month-on-month, declining unit shipments and lower average selling prices (ASPs) in several key market segments were a factor,” said SIA President George Scalise in a statement.

The last thing AMD needs is a decline in both prices and demand. The company is in something of a holding pattern until it ships its much-vaunted Barcelona processors this summer, and there has been talk of a private equity takeover since February.

One of the first analysts to raise the alarm bells was analyst Doug Freedman of American Technology Research, who issued a February research report on surprising strength in AMD's stock after months of decline. ''When we polled clients as to the reason behind the strength, we were told that private equity rumors were circulating,'' he said in the report.

Going private like that would certainly alleviate some of the pressure on the company, said Insight64 analyst Nathan Brookwood. "Given that over the next couple of years it is quite likely there will be some periods when AMD is eating Intel's lunch and other periods when Intel is eating AMD's lunch, being private might not be such a bad idea," he told internetnews.com.

AMD doesn't have the option of slowing down its spending if it wants to keep up, said Brookwood. Both companies tend to leapfrog each other with new chips, so when one is up, the other is down. "Wall Street is not at all patient with the guy who has been leapt over. AMD hasn't handled that as well as they could have or should have," he said

One of those Wall Street people following AMD is Charles Payne, CEO of Wall St. Strategies, who doesn't think AMD can continue at its current pace. "It's just going to really start to hammer away at their cash," he said. "They are being squeezed trying to compete with Intel at the pace they are trying to compete and with the pressures Intel has been applying lately."

The rumors, and the notion of going private both have a lot of merit, said Payne. "The valuation metrics are very good. The price-to-book ratio is 1.2. The question is, do you trust current leadership? The answer is no," he said.

While Opteron has been a big success, Payne faults management for delivery problems AMD has had in year's past with advanced technology products such as its Athlon processor. Having a solid product, but not being able to deliver it is the kind of scenario appealing to private equity firms, because fixing supply problems are a lot easier than fixing bad engineering.

"When there's hidden value that hasn't been unlocked, private equity guys come at this from a different perspective. They have a way of cutting costs and cleaning them up," he said. History also tells us equity managers are pretty good at repackaging companies, but don't necessarily fix underlying problems, unless they attack cost problems.

The two analysts split in their view of Barcelona, the company's forthcoming quad-core Opteron design that AMD swears up, down and sideways will bury Intel's best Xeon processor. Payne said Barcelona better be the hit AMD says it will be because it has "nothing else on the drawing board."

Brookwood thinks it remains to be seen what Barcelona will do, but he added that when you control the high end in the server market, it turns out you can control the pricing for your product but your competitor's products, too. "When AMD had the high end, Intel was forced to discount a lot," he said.

Neither analyst knows if private equity buyers are indeed speaking with AMD, kicking the tires, or waiting, but they did agree on one thing: AMD should consider it.