AMD: To merge or not to merge?
TG Daily In Depth - The past 19 months certainly haven't been easy for the green team from Sunnyvale. Lately, we have seen persistent rumors that AMD has become an acquisition target, leading us to look a bit closer into what's really going on. To merge or not to merge, that is the question.
You have to admit, it is somewhat obvious. AMD has been trading below a $4 billion market value for some time and there are many companies out there, which could purchase AMD in a snap, if they wanted to get into the CPU business. So these acquisition rumors aren’t really surprising. We believe that AMD could a very interesting target for an acquisition and there are two obvious candidates. Let’s take this step by step.
Before Intel managed to kick ego-boasting, sleeping-on-laurels AMD with its brilliant Core 2 architecture, a lot of people thought that AMD's success was all up to the firm’s current management, headed by ex-Motorola executive and advisor to George W. Bush, Hector Ruiz and his gang.
The truth of the matter is that all these guys execute on a situation, which had been brilliantly created by Jerry Sanders III and Atiq Raza. After losing out on the Microsoft Xbox deal and with K8 in advanced development, Sanders felt that they needed to bring a strong seller and a good politician to the team. Hector Ruiz was selected. This was followed by the arrival of Henri Richard, who introduced the company into sport sponsorships, creating a successful relationship with companies such as Ferrari, Lance Armstrong, and soccer clubs in Europe.
From a company that was losing out heavily in the mid-90s, AMD delivered a major coup with the K7 design (known as Athlon), a chip that trounced Intel's Pentium III. The K7 design was the baby of a team led by Dirk Meyer. This was the first time in history that AMD managed to produce a better part than Intel. The result was that even companies in Taiwan and China started to warm up to the Green field instead of the Blue river. The success of AMD in the early 2000s is especially obvious today, for example when you go and visit the factories that manufacture graphics cards, USB sticks and other components. In most factories we have visited, AMD Athlon 64 systems are the "weapon of choice" for qualification and testing processes. This is a fairly business in terms of production numbers and sold units, but it is priceless in terms of the influence such installations deliver.
The downward spiral
AMD was always preaching the "customer centric" mantra, but in reality, the company was changing processor sockets and making incompatible design calls almost every 12-18 months. AMD's Athlon 64 debuted with Socket 754, but when the company learned of its mistake, it created Socket 939. Athlon 64 FX was an interesting story, changing Sockets as marketers wanted: In the beginning, there was Socket 940, then 939, then back to 940 (AM2, AM2+, AM3 also use 940 pins, but are incompatible with the first S940). Also, AMD kept on promising something that it could not deliver: Backwards compatibility. SI's had ton of issues with Santa Rosa Opterons, and the whole debacle over Phenom upgrades as tested over at Tom's Hardware makes you wonder. While Intel remains silent and has been using the same socket for several years, few dared to openly criticize the giant. The company kept the same socket, but prevented an upgrade option (e.g. you cannot put a new CPU on an older motherboard, due to "some XY incompatibility").
There are numerous examples where AMD went wrong in 2007 in its communications, forgetting the workstation market at the K10 Opteron launch (this was an answer given to us by Dirk Meyer in Barcelona), abusing the channel and losing already won HPC contracts with its inability to ship thousands of Opterons to this segment. And yet, at events such as the firm’s Analyst Day, you see lots of people approving the mantra of AMD leadership - and not asking critical questions.
At the end of the day, you can’t describe it differently than saying that AMD screwed up badly in 2007. AMD itself called 2007 the “perfect storm” for the company, but we have to realize that everything was magnified, because all eyes were an the company. Back in 2002, and in the 1990s, nobody considered AMD to be a serious player. Now, it is in the limelight, and has been making wrong choices every step of the way. The exodus of members of the management as well as key engineers after the takeover of ATI was just the silent witness that something went terribly wrong.
Where are we now? We're left with the prospect of an AMD/ATI that could be acquired by either IBM or Nvidia. The relationship with Nvidia is a very interesting one - SNAP.
Read on the next page: SNAP - Strategic Nvidia-AMD Partnership
SNAP - Strategic Nvidia-AMD Partnership
As you may or may not know, the relationship between AMD and Nvidia has been a long one, starting with the first Xbox, which unleashed nForce to the world. It is not a secret that AMD had Xbox all lined up, with Microsoft buying a special version of the CPU that was somewhere between Duron and Athlon. If we recall it correctly, AMD's XCPU was a Duron design with 128 L1+128KB L2 cache, instead of Duron's 128KB L1 + 64 KB L2 cache combo. Intel pimped AMD at the last minute with a Pentium III design (actually, this design was more Celeron), and all of the AMD presentations in which AMD was praising its Nvidia and Microsoft relationships, were flushed down the toilet.
Given the fact that SNAP was ousted out of the Xbox, AMD and Nvidia continued to collaborate closely on bringing the Xbox design to the PC: nForce 420 was launched in June and shipped in September of 2001, ahead of Xbox console. It was nothing but an original nForceX design for Microsoft, with original support for EV6 FSB (that AMD used) instead of Intel's GTL. A year later, this was followed by the legendary nForce2 chipset, which was sold in the tens of millions (quite a high number for an enthusiast chipset) and Intel was constantly shunned for an Intel-based nForce. Nvidia was disappointed with the nForce3 design, since it was completed a year ahead of Athlon 64, and that gave the company time to create nForce 4 SLI for Intel, only to be screwed by Intel's Pentium D 820 design, which was incompatible with the boards (a desperate bid to avoid utilizing overclocking capabilities of the chipset). This is the reason why Nvidia is extremely careful in its dealings with Intel, and the recent nForce 680i-Intel 45nm Penryn fallout only reminded us of the fragile relationship between the two.
SNAP continued to take place even after the AMD-ATI buyout, with a war that engaged AMD people against ATI people. This led to ATI's roadmaps being leaked to Nvidia and various departures from key engineers harmed the product cycles. We believe that this could also turn out to be the most critical mistake Hector Ruiz made as CEO of AMD. He did not voice out clearly what would happen with ATI and why the acquisition was necessary. When we heard stories that involved various people from AMD’s Human Resource department – this author vividly remembers questions like "Why can't we fire more ATI people?" in internal e-mail communications.
AMD started attacking Nvidia in summer of 2007, making bundle deals that included AMD's processors and ATI graphics and chipsets for the "back to school" period. Thus, a whole year was lost. We all know that Nvidia gained tremendous market momentum.
Failed AMD-Nvidia merger, take I
However, with the recent talk about Nvidia buying ATI, it would be only logical to go back at that point in time when AMD wanted to buy Nvidia. In fact, Nvidia was AMD's first choice for acquisition. At the time of negotiations, AMD's market cap was $23 billion, and Nvidia was worth somewhere in $11-13 billion range, or just about dead-even between merger and acquisition. We're talking about the second half of 2005, and AMD was looking into ways to respond to upcoming Intel threats called Nehalem and Larrabee. We learned that it all fell apart because of a fallout between Hector Ruiz and Jen-Hsun Huang, Nvidia’s CEO. Huang wanted the CEO position, a position that Ruiz did not want to surrender. If that merger had gone through, we would probably have a monster semiconductor company right now, with Athlon 64, Phenom, Opteron and GeForce, Quadro and nForce dominating the market, regardless of the strength of weakness of some components in the package.
AMD turned its focus to ATI, and merger talks between AMD and ATI began at the very end of 2005. The deal was set to happen by March 2006, and it was publicly announced on July 24th, 2006. The Inquirer wrote an excellent analysis on the subject, but the fact remains that ATI was a second pick. If AMD had been smart enough, an acquisition of Ageia would have provided the company with a foothold in the physics segment, instead of constantly making two steps forward and one step back.
AMD-Nvidia merger, take II
Fast forward to November of 2007. AMD is in trouble and the natural call for Jen-Hsun Huang surfaced again. Approaching Ruiz and the gang with the attitude "what goes around, comes around" and "I want to buy you now" did not go well, we hear. But business is business and is never personal. There was no reason why the deal would not have gone through. All Nvidia needed was enough money to take the company AND the debt. A repeat of the 3dfx charade is not an option here.
However, in order for that to happen, the only way to go was to get support from partners from AMD's eco-system and this is where the trouble apparently started. While Nvidia is achieving record success with sales, it has done so by weakening its partners. From a company that started selling GPUs with memory back in GeForce3 days (and threw Guillemot/Hercules out of the race), Nvidia turned into a company that now sells a complete card, and partners are nothing else but "sticker stampers". This crashed the profits of all the companies involved, and many disappeared. With Nvidia controlling the AIB market for both ATI and Nvidia products, Taiwan would rush into Intel's arms. Memories of what happened with 3dfx when an ex-Siemens CEO took over the company are still livid in the world of graphics card manufacturers.
The second unfavorable factor is the debt-to-equity ratio. Nvidia has a lot of money in the bank, currently about $2.4 billion, but to eat up a company like AMD, it would have to cough up somewhere in tune of $10 billion, since AMD is $5.4 billion in debt.
But with AMD on-board, any rumors that Nvidia is toast would be eliminated forever. Also, Intel would have to face Nvidia on almost every front of its businesses. Nvidia can easily diversify into a networking company (it bought a 3Com team ages ago, which is the reason for the brilliant "plug'n'play" connectivity in nForce chipsets), into a handheld company (APX 2500 is much more important than you might think at first), desktop platforms (Phenom+nForce+GeForce), mobile platforms (Turion+nForce+GeForce), workstation platforms (Opteron+nForce Pro+Quadro), server platforms (Opteron+nForce Pro+Tesla), HPC platforms (Opteron+nForce Pro+Tesla), etc. And, of course, with the recent purchase of Ageia, nothing would stop the company from implementing PhysX in every pore of its DNA.
Sadly, Huang's fault is the fact that he believes in the value of a single company. Just like the company destroyed the 3dfx line-up and did not use the world's second IT brand (Voodoo, just after Pentium) to its full potential, we have no doubt that Nvidia would cannibalize ATI and basically screw up its chipset development, as well as the development of future Radeons. Instead of creating synergy, the company would probably lose valuable time in preparations for the arrival of Nehalem and Sandy Bridge from the CPU side, and Larrabee from the cGPU side.
Read on the next page: Why IBM could be interesting, Conclusion
IBM is a logical choice to buy AMD. For starters, AMD cannot be bought by just anybody, since there are limiting factors with the license for the x86 architecture. If AMD would be acquired by a foreign company (such as Samsung), that license would be lost, and that would diminish the value of AMD as a company. Thus, Nvidia and IBM, are the only two real players are in the game.
When it comes to IBM, the matter of market cap is very simple - AMD is currently valued at $3.88 billion and Nvidia goes for $13.44 billion. IBM is valued just below the $150 billion mark. Thus, AMD is pocket money for IBM, and the potential gains with AMD under IBM's wings are numerous.
For starters, IBM has a ton of manufacturing partnerships and is a member of a manufacturing alliance that involves AMD, IBM and Chartered from one side, and Toshiba and Sony from other. Let's not forget the fact that with AMD/ATI (or just Daamit) on-board, IBM would rule the world of video game consoles - all three consoles feature IBM processors, and the two leading consoles have ATI GPUs inside. The next generation of consoles could look much different, if IBM would have such design teams to develop complete solutions for Microsoft, Sony and Nintendo. And the market of 200-300 million consoles is very attractive.
There is also a small fact that AMD relocated one engineering team from Austin, TX to East Fishkill, NY - to work on a new manufacturing processes on the spot. With a lot of AMD engineers working closely side-by-side with IBM on next-gen designs, opening all secrets would create an incredibly flexible semiconductor giant that would be able to seriously cut down Intel's market share.
This would also propel IBM into worlds that are currently closed for the company, such as the consumer electronics segment, where ATI Imageon chips go head-to-head against STMicro, Thomson, Philips, Silicon Optix and others. The handheld market is also an interesting segment where ATI and Nvidia ship hundreds of millions of chips per annum, and we won't go into lucrative HPC deals where IBM usually competes either with its Power, Cell or Intel chips. Going all-IBM in the x86 arena would also open a new world for IBM's services, and this is what the company wants to influence. With ATI on board, IBM would enter the world of visual computing, which is set to dominate the world in decades to come (holographs, HUDs, monitors everywhere we go).
GPGPU also comes to mind, and this is the reason why both IBM and Nvidia would want AMD very, very badly. AMD has been quite vocal about integrating GPGPU-friendly improvements, and GPUs would gain CPU-friendly features.
What speaks against an acquisition of AMD by IBM is IBM’s current direction into services.
With Nvidia not having any support from partners to buy AMD, and the fact that the debt-to-equity ratio could prove deadly, Nvidia is effectively out of the running for the company. A deal could still happen, but if AMD is for sale, IBM is the logical choice.
As some Intel insiders have told us, this would be the move that scares Intel's leadership beyond belief. There is a saying inside Intel: "IBM is a vampire that never dies". You can give it Tom Cruise's face, but the fact of the matter is that IBM has been around the block before the block even existed.
A combination of IBM and AMD would leave x86 licenses safe and intact, and that is a matter of utmost importance. From another side, the manufacturing alliance should not be overlooked.
A third option for AMD is to weather the storm and stay on course alone, surrounded by a ton of partners, and faith that K10.5 and K11 will bring out competitive CPU parts, to complement graphics and chipsets. Only time will tell how this story ultimately unfolds.