AMD “Exploring Options” Including Breakup, Sale

Shares of the chipmaker Advanced Micro Devices are up by more than 14 percent on a report by Reuters saying that the company has hired J.P. Morgan to “explore options” that could include a disposition of its patents or an outright sale.

Update: AMD is now saying the company is “not actively pursuing” a sale in statements to The Wall Street Journal, and which spokesman Drew Prairie just re-iterated on the phone to me. One key observation: It is not denying that it has hired JP Morgan.

Remember that third parties have already been brought in to advise AMD executives. Before the layoffs, McKinsey and Co. was engaged to handle the job cuts, while the Boston Consulting Group was brought in to advise on a new strategy. Who says JPMorgan or another bank hasn’t been brought in to advise on the sale of patents or other assets?

The news can’t come as too much of a surprise, given the troubles AMD has seen of late. But it also comes on the heels of a whole new strategy in which the company said it would would take an “ambidextrous” approach to chips. It said last month it will combine its x86 technology, which it shares in a complicated patent cross-licensing arrangement with Intel, with the ARM chip technology that is so popular in smartphones and tablets and is now encroaching into low-end notebook PCs that were once part of AMD’s bread and butter.

It should be noted here that all this comes days after AMD nominated Ahmed Yahia Al Idrissi, the second representative from its largest shareholder, the Abu Dhabi-based sovereign wealth fund Mubadala Development Company, to its board of directors. I have heard, but not been able to confirm, that the reason for the nomination of Al Idrissi to the board had to do with a trigger provision of the agreement between AMD and the investment firm concerning stock price.

AMD is facing a significant cash crunch and recently cut about 15 percent of its workforce in a brutal restructuring.

As I’ve argued before, AMD will be an incredibly complicated company to acquire.

Within minutes of announcing a deal, any potential suitor would likely find itself on the business end of a visit from lawyers for Intel. As I noted, Intel and AMD have operated under a series of complicated and mostly secret patent cross-license agreements that give AMD access to the crown jewels of Intel’s intellectual property — the x86 instruction set.

The name dates back to the days when PC processors were known by model numbers like “386” and “486,” and the instruction set is a fundamental piece of what makes a PC a PC. The patents are also important to servers, and, as Intel has slowly worked its way into selling chips for tablets and smartphones, to mobile devices, as well.

When AMD first sought to spin off its manufacturing operations into the company that became GlobalFoundries, Intel and AMD were in the middle of a bitter antitrust lawsuit. Intel argued, not without merit, that AMD couldn’t assign its access to the x86 patents to another company, even in a spinoff, without first getting Intel’s approval. Adding to the complication was the fact that AMD had been taking investments from that Arab sovereign wealth fund. Ultimately, they resolved the dispute as part of a broader settlement hashed out in a series of difficult negotiations with the help of a mediator on the Hawaiian island of Maui in late 2009.

Part of that settlement limits Intel’s behavior in such a scenario. It agreed to hold off on suing to block anyone seeking to purchase any of its competitors — AMD is really the only one — for one year and negotiate first. But no matter what, any company that reaches a deal in principle to buy AMD will then have to turn right around and negotiate with Intel. And those negotiations could easily fail and send both parties to court.