Accountability
Q2 earnings season is upon us and, for the tech sector, this week will be as revealing as any.
After the apparent success of its recent GPU launch, AMD has had the wind seriously taken out of its sails with the announcement last Friday that it was writing down a further $880 million of the value of its ATI acquisition.This writedown will be incorporated into its Q2 earnings announcement this Thursday.
This is the sixth quarter in a row, since its October 2006 acquisition of graphics giant ATI, that it has written down the value of the deal. ATI was bought for $5.4 billion – a 24 percent premium at the time. The quarterly writedowns and charges since then, in millions starting with Q1 ’07, go as follows: $113, $94, $78, $1669, $50 and now $880. That makes $2.884 billion – over half the value of the acquisition.
This raises a couple of questions: was the ATI acquisition a mistake and, if so, who’s to blame? A look at the Q1 '08 AMD earnings reveals that the Computing division, which includes CPUs and chipsets, had an operating income of $1.194 billion, while the graphics and consumer electronics divisions – which are almost entirely ATI derived – had a combined operating income of $311 million.
This gives us a revenue split of around 4:1 between the AMD and ATI parts of the company, although this figure is complicated by the fact that the chipset offering has benefitted from the addition of ATI technology and expertise.
AMD’s market capitalisation is currently $2.94 billion – around $10 million more than the total writedown of the ATI deal so far. Meanwhile, ATI only contributes a fifth of the revenue for the combined company. So in retrospect you would have to say that, if not a complete mistake, the ATI acquisition was at least very bad value.
The blame for this has to lie squarely with the man who was AMD boss at the time and is still in place now: Hector Ruiz. AMD’s share price at the time of the ATI acquisition was around $20 and it’s now a quarter of that, yet we don’t hear calls for Ruiz’s removal like we do for Yahoo!’s Jerry Yang.
It would be interesting to hear activist investor Carl Icahn’s thoughts on AMD. He could probably find $3 billion down the back of the sofa or, for considerably less, initiate a proxy fight to replace the current board as he’s currently doing at Yahoo!.