Advanced Micro Devices Jumps on Takeover Chatter

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By Amy Olmstead
Staff Reporter

Takeover chatter swirled around

Advanced Micro Devices

(

AMD

:NYSE) as the generic chip maker's share price shot higher on twice its average volume.

The company, the second-largest maker of microprocessors behind segment dominator

Intel

(

INTC

:Nasdaq), saw its shares rise more than 4% to 36 1/2. Options trading was also heavy. The

Pacific Stock Exchange

said it traded 8,368 contracts, up from 6,508 contracts on Thursday. The most heavily traded contracts were the August 40 calls.

"I haven't heard that rumor," said John Greenagel, a spokesman for AMD, who reasserted AMD's long-term outlook that the company's interests are best served by remaining independent. "There really hasn't been any news."

It's tough to figure who might be on the buying end. For AMD fans, a takeover bid would provide welcome news. The stock has stumbled amid weaker-than-expected earnings performance. Since early May the stock has dropped 19%, despite Friday's rally.

"In recent weeks there have been more rumors of takeovers, but so far only about one out of 11 have ever happened," says Lou Ehrenkrantz, publisher of the

Ehrenkrantz Report

. Ehrenkrantz has heard the AMD rumors, but he doesn't anticipate a Monday morning announcement. "I have no reason to believe this will work out. In 1985 there was a similar rash of rumors and odds are against the speculator that buys on the rumors when they're so rife. 'Rumor du jour' we call it."

Some analysts said fundamental issues could be driving the rally in AMD's share price.

"There's a general perception that the PC makers are starting to buy for the fall, increasing their purchases and showing more activity in the last week," says Lawrence Borgman at

Josephthal Lyon & Ross

.

With or without a merger, influential semiconductor analyst Drew Peck at

Cowen

is curtailing his estimates based on last quarter's earnings, the Intel price war and pricing pressure on flash memory chips. Peck expects third-quarter earnings to be 34 cents a share, compared with 35 cents for

First Call

. His firm hasn't done any underwriting for AMD.

Past performance has been a letdown -- second-quarter EPS was 7 cents compared with the consensus estimate of 22 cents. And AMD hasn't made any major customer announcements since April's news that

Digital Equipment

(DEC)

would be using AMD's K6 microprocessor -- a rival to Intel's Pentium -- in a line of personal computers.

Peck thinks that AMD's stock will fall further before it stabilizes, maybe to the mid-20 range. "The company has to come up with a strategy to deal with the pricing pressure

from Intel," he says.