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AMD Needs to Sell Out — Now

Cost-cutting alone isn't going to save the crumbling chipmaker


AMD (NYSE:AMD) shareholders got some hope yesterday. A report from Reuters indicated that the chipmaker retained JP Morgan (NYSE:JPM) to explore the sale of AMD’s patent portfolio or the company itself. On the news, the shares spiked 18% to $2.35.

Unfortunately for investors, the report turned out to be bogus. And yes, ADM’s shares are now back to $2.

Whenever a company is in trouble, buyout rumors become inevitable. Just look at Research In Motion (NASDAQ:RIMM).

But AMD management really should get aggressive with this option because all in all, the long-term prospects look grim. In the latest quarter, AMD’s revenues dropped from $1.69 billion to $1.27 billion. The forecast for the next quarter is another decline of 9% to $1.1 billion.

The fact is that the global PC market is contracting. Barclay’s (NYSE:BCS) analyst Ben Reitzes believes this will continue for “for years to come.” He’s forecasting a 3% drop in PC sales in 2012 and 4% fall-off in 2013. Just some of the factors include the global economy, Microsoft’s (NASDAQ:MSFT) lackluster Windows 8 operating system and the growth in tablets from players like Apple (NASDAQ:AAPL) and Amazon (NASDAQ:AMZN).

That makes AMD’s market share fight against mega-rivals like Intel (NASDAQ:INTC) even tougher. What’s more, AMD’s mobile strategy is nearly nonexistent.

What to do? Well, AMD’s main response has been cost-cutting. To this end, it plans to slash about 15% of its workforce. While this will help to reduce the cash burn, it also means innovation will continue to lag.

AMD still has a set of interesting assets, including about 4,500 patents and 1,500 that are pending. What’s more, the company has advanced chipmaking facilities in places like China, Malaysia and Singapore. However, it’s a stretch to believe that AMD will get much of a premium for those assets. After all, the company is mostly tied to the PC business.

That’s why a buyout remains a better option. After all, it seems more attractive than continuing to deteriorate as rivals eat into market share and cash flows get more squeezed.

Tom Taulli runs the InvestorPlace blog IPOPlaybook, a site dedicated to the hottest news and rumors about initial public offerings. He is also the author of “How to Create the Next Facebook.” Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.

Article printed from InvestorPlace Media,

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