Even after months of rumors about the deal, Advanced Micro Devices' ( AMD) acquisition of graphics-chip maker ATI Technologies ( ATYT) left many on the Street scratching their heads.
For many investors, AMD's $5.4 billion purchase is too much money, at the wrong time, for something with a dubious upside. "I'm looking at the logic of this and still struggling with why they AMD need to own it themselves," said one investor, who asked to remain anonymous because he was trading both companies on the news. ATI's shares surged 18% from the announcement Monday morning. But AMD's stock sank more than 4%, or 82 cents, to $17.44 -- setting a new 52-week low for the Sunnyvale, Calif., microprocessor maker. AMD will spend all of its reserve of $3 billion in cash and short-term investments as well as taking on an additional $2.5 billion in debt to finance the deal, which has been approved by both companies' boards of directors. The move will effectively swing AMD into a debt position just as it is facing big capital spending increases to upgrade its chip-fabrication facilities (the company recently announced $2.5 billion in capex next year, up from a projected $1.7 billion for 2006) and tough competition from Intel ( INTC) in the microprocessor market. "One of our major concerns regarding this agreement relates to the heavy debt load that AMD will be taking on to fund the transaction, which is likely to hamper the company's flexibility significantly in the near to midterm," Susquehanna Financial Group analyst Kevin Vassily wrote in a note to investors. With the acquisition, AMD gains one of the top makers of specialized graphics chips for personal computers. The real significance for AMD, however, is ATI's business of producing chipsets -- the chips that shuttle data to and from the microprocessors that AMD and Intel make.