Leading mobile chipmaker Qualcomm (NASDAQ:QCOM) may be gearing up to buy AMD or at least a segment of the company. Reuters recently reported that AMD is mulling its options of breaking the company up or spinning off some of its sectors, although AMD later denied the report. Given the company’s lack of success in recent times, there have been many claims by public and media alike of AMD facing a strategic quandary with few options. In addition, at a recent conference, Qualcomm CEO Steve Mollenkopf mentioned that the need of the company to enter the data (an unaddressed market) via M&A, suggesting the possibility of targeting a microprocessor company. Thus, many see AMD as the most realistic financial possibility.((Qualcomm May Acquire AMD, Seeking Alpha, July 23rd, 2015))

AMD’s fortunes have fluctuated wildly over the past decade because it failed to react promptly to changes in the market and to Intel’s relentless challenge in the x86 market. Since the beginning of the millennium, AMD’s shares have lost more than 90% of their values and the only reason why Intel didn’t squeeze it out of the market completely is because of potential antitrust/monopoly concerns in the US. With all this going on, AMD is left struggling and there are only two case scenarios in which the company can at least stay in the game. First would be if Qualcomm buys AMD, which would not be that expensive as AMD’s current valuation stands at $2.9 billion and it has net debt of $2.3 billion and cash of about $900 million. A second option is if Qualcomm buys the server offering of AMD, though this seems unlikely. In both cases, there could be benefits to both the companies. AMD cannot survive alone in the cut throat market and Qualcomm will have a much powerful chip with some amazing graphics.

As for the “why only Qualcomm”?  If Qualcomm wants to succeed in the server/enterprise market, it needs an initial foothold.  Samsung, Calxeda and Nvidia have pulled out of the race, leaving AMD as the only serious competitor to Intel, although Broadcom, Cavium, Marvell and Applied Micro are entering as well. Qualcomm has been mooted as a potential suitor the last time AMD was apparently put up for sale back in 2011.  Back then, though, the company was worth three times more and Qualcomm had much less liquidity.

If this Qualcomm-AMD deal rumor turns out to be true, Qualcomm well be entering a wide range of  new businesses beyond server processors —  the market for PC processors. AMD enjoys a strong position with its APUs for integrated graphics, as well as the APUs that power all three gaming console platforms – Nintendo’s Wii U, Sony’s PS4 and Microsoft’s Xbox One. Also, we can expect to see the Snapdragon processor come out in full force over time. Buying AMD would give Qualcomm not only access to an impressive portfolio of customers and some of the best engineers in the world, but also the foothold it wants in servers.

For AMD, the deal may not be so bad either. Under the umbrella of consolidation, and AMD’s stronger focus on processors that appeal to the biggest chunks in the consumer market, and less on competing with Intel for the fastest processors, makes Qualcomm’s consumer electronics products a good fit. If Qualcomm acquires AMD, it could be a death sentence for the AMD brand in the long-term, but engineering and competitiveness could benefit on both sides tremendously.

By: DocMemory
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