According to our sources, it looks like AMD is not done with acquisitions, and their second potential acquisition might be the second most important one they did in 20 years. While it is too early to tell were our sources misleading us (thus, take this piece with a fair grain of sea salt), the story was told to us with compeling arguments.
Ever since AMD came into microprocessor scene as the second source for IBM, the company was tied to Intel’s X86 architecture. According to sources, AMD is one of bidders for MIPS Technology, a company that’s been producing its own CPU architectures (both 32- and 64-bit) for over three decades now. Last Thursday, Bloomberg revealed that "MIPS hired Goldman Sachs to pursue a potential sale." We view this as a strategic leak for the final stage of acquisition negotiations, not the initial one.
As a consequence, MIPS stock continued its stronge surge and it looks like the acquisition strategy might pay off. After all, if Facebook bought Instagram, a 13 people company without strong IP, how much value holds a sub-150 people company with over 500 patents and employing some of brightest minds in the industry? Remember, MIPS has a chip that runs Android 4.0 ICS and consumes LESS power than competing ARM parts. Furthermore, that chip is built in old 65nm process versus power saving 40nm and 28nm competitors.
On Financial Analyst Day 2012, AMD CEO Rory Read and newly appointed Senior VP Lisa Su disclosed that the company is contemplating opening to "3rd party IP" causing numerous media running stories that AMD will/should announce ARM as their second architecture license. However, if you are able to pull it off, why license another 3rd party architecture if you can relatively affordably buy your own?
Echos of NexGen
Back in 1995, AMD acquired NexGen Inc. for $865 million in stock and completely turned the company around. Jerry Sanders, founder and then CEO of AMD got invaluable engineers in the form of Dirk Meyer, Fred Weber and Ravikrishna Cherukuri (Ravi Krisha). NexGen created a processor that competed against the first Pentium and outperformed AMD’s own part by quite a margin. That processor became K6, K6-II and K6-III – buying time for Ravi Krishna to build the K7 chipset and Dirk Meyer to build the K7 (original Athlon). Fred Webber worked on K8, the first 64-bit x86 processor. If you follow the industry, you recall that K7 and K8 demolished Intel in IPC (Instructions-per-Clock) and placed AMD firmly in consumer and enterprise space.
Out of those three names mentioned, two are sitting in MIPS Board of Directors and play an active or semi-active role in the company. Mr. Ravi Krisha is Vice President of Engineering, while Fred Weber is a board member. Other two board members are investors, i.e. venture capitalists.
MIPS: An Amazing Turnover
In the past 18 months, we have seen an amazing turnover by MIPS. The company had 500 employees in 2008, dropped to just 150 in 2010 and then appointed Sandeep Vij as the CEO. From the company that was obviously flaming out, a strategic turnover was powered by decision to go for mobile industry using Google Android operating system.
The company expanded the list of licensees and brought in support for wireless partners for 3G/4G network standards, started to work very closely with prospective clients and they get the title to power the world’s first $99 Android 4.0 tablet, which we reviewed recently. The company is now executing the goals which were "new licenses for a range of target applications including mobile internet devices, e-books [tablets], DTVs, set-top boxes, home networking, automotive, and digital still cameras, as well as the mobile handset license."
Investors followed suit and in the past 12 months, the stock gained 48%, raising the market cap to $350 million. Given that AMD recently spent cash on acquiring a micro-server maker and lost a lot of engineering talent, acquiring a semiconductor engineering company seems like a logical move.
One of biggest problem to this hypothetical buy highly possible acquisition is the fact that according to very reliable sources, AMD is currently effectively run by its CFO, Mr. Thomas Seifert. While Mr. Seifert created a small miracle by creating a framework which resulted in returning over four billion dollars of debt since 2009 (propeling the stock from $2 to today’s $7.8) – the company lost a lot of engineering talent. One of very highly ranked executives once told us that "Mr. Seifert would not recognize a golden goose if he tripped on one." While this might be a bitter pill from a disappointed veteran, the fact of the matter is that AMD lost billions of dollars in revenue on netbooks, and a lot of revenue was lost by not investing as much in graphics business – today, NVIDIA has smaller GPU market share than AMD and much higher profitability.
That same money means nothing to true visionaries, since Intel burned through several billion dollars and failed to create a discrete GPU. AMD recently lost a lot of key engineers and executives that currently run technology departments in Apple, Samsung Semiconductor, Intel, Qualcomm and the list goes on.
Thus, acquiring MIPS could be a Hail Mary pass to get a set of brilliant people and not overburden the cash flow.
Alternative for MIPS is quite obvious – should AMD fail to acquire the company, i.e. get outbid by other parties, the logical choice would be Google, NVIDIA or Qualcomm.
Bear in mind one thing – according to our sources, creating a 64-bit ARM architecture is not going smooth. 64-bit MIPS exists since 1991 and it powered computers from Silicon Graphics, Fujitsu, Intergraph and others.
The stage is set, we are now waiting for the players. Who will marry who?