Microsoft (NASDAQ:MSFT) is allegedly engaged in active negotiations with Advanced Micro Devices (NASDAQ:AMD) for a potential buyout. Rumors of potential AMD acquisitions by larger industry players are anything but rare occurrences. Such rumors however have been particularly more prevalent than usual in more recent weeks and months surrounding the Sunnyvale based chipmaker AMD. This is the second report in a row that has claimed that there's strong interest from the part of Microsoft to acquire AMD following a rumor alleging identical claims earlier this summer.

AMD already supplies the hardware for Microsoft’s XBOX One gaming console as well as its main rival the Playstation 4 from Sony. The Redmond based software giant and the Sunnyvale based chip maker have maintained a close relationship for a very longtime. In fact they have worked together on multiple generations of Microsoft’s graphics programming interface, DirectX, as well as some of the company’s previous generations of gaming devices such as the XBOX 360. Despite the common interests that both companies share in the PC market and gaming, they actually address these markets through a vastly different set of tools, expertise and perspectives.

One’s a predominantly software giant that has dabbled in hardware in more recent times but with fairly limited success. While the other is a component maker that specializes in cutting edge graphics and general purpose microprocessors and has only dabbled with software recently, again with fairly limited success. This might therefore seem like a match made in heaven, but it’s far from it.

A Microsoft That Owns AMD May Face Several Insurmountable Hurdles

Anyone who’s been around for long enough will know that company acquisition rumors are a dime a dozen. And anyone who’s managed to pay attention to the PC industry for any notable amount of time will be both cynical and skeptic enough to not take these types of rumors too seriously. Certainly time has proven that many of them have very little to do with sense or reality. So it’s important to highlight some of the glaring issues surrounding today’s acquisition rumor before speculation starts to run wild as it usually does.

Not too long ago Microsoft faced a number of serious allegations over monopoly concerns. The company even ended up fighting against litigation from the United States government over this issue. In fact, a judge issued in his court’s findings of fact that he had found Microsoft’s dominance of the x86 market had constituted a monopoly.

A premise in which Microsoft buys AMD and attempts to sell Windows systems powered by its microprocessors and graphics chips will inevitably raise a red flag. A Microsoft that owns AMD can’t simply make and sell personal computers with components made from the IP of the latter without It unearthing those monopoly concerns once again. And this time it would not only involve the US government but also multiple industry giants that will undoubtedly fight tooth and nail to protect their lucrative businesses.

It not only puts Microsoft in the unenviable position of competing directly with microprocessor and graphics industry giants Intel and Nvidia. And it would take place in a hardware market that Microsoft has no prior experience in nor any previous tangible success. But it does so while putting the company in a position where any advantage it could potentially gain from owning AMD’s graphics and microprocessor IP would completely dissipate.

While Microsoft can certainly afford to buy AMD out, there’s no clear sense in doing so. Corporate acquisitions are made to embolden a company’s competitive stance, explore greenfield opportunities and/or put fuel on an already burning flame of growth. Not to open several difficult fronts in already mature and hyper-competitive markets with established market leaders. Microsoft maybe able to achieve some of the former with this acquisition, but it definitely can’t do it without incurring the latter. In summary Microsoft’s cash would be wisely spent elsewhere and CEO Satya Nadella is undoubtedly acutely aware.