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Dell to buy AMD?

All hat and no cattle

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With Intel and Advanced Micro Devices both cranking the clocks on their respective Xeon and Opteron server processors this week and Dell admitting that it's on the prowl for acquisitions, tongues have started to wag about the possibility of PC and server maker Dell snapping up AMD.

Barron's, the supposedly more thoughtful part of the Fox/Dow Jones media empire, reported Monday afternoon that AMD's shares were up 5 per cent because of rumors that it might be acquired by Dell. Bloomberg chimed in a few hours later, quoting Patrick Wang, an analyst at Wedbush Securities, as saying there was "chatter" about a Dell deal to buy AMD although he conceded it was a "far-fetched possibility."

Not that the suddenly chip-happy Larry Ellison, co-founder and CEO of Oracle, talking about buying semiconductor companies last October - and rumors swirling about AMD in particular - could qualify as "near-fetched." (Tip of a hat to George Carlin.) At the time, Dirk Meyer was president and CEO of AMD, and while he denied that AMD was for sale, he also said that AMD was "happy to listen to any proposal" that was in the interest of shareholders.

Meyer was sacked by AMD back in early January, so it his opinions are moot at this point. But it seems unlikely that Dell would spend any of its $14.4bn in cash to acquire AMD. While this might be fun, it is not what Dell does.

For one thing, Dell was dragged kicking and screaming to AMD Opteron chips in the past decade and it has learned, through the issues with both Xeon and Opteron chips, to not tie itself too tightly with any chip maker. That is why Dell is an ardent supporter of both Xeon and Opteron chips.

AMD sells products to Dell's competitors (although not as many as it used to, mind you, with IBM giving the Opteron tepid support and Oracle killing off its Opteron products), and a big chunk of its business and therefore that market cap only exists because AMD has Dell and others as partners. The minute Dell bought AMD, it would inherently be worth less money because Dell would only want AMD to make its own chips for servers, storage, and PCs and leverage these as an advantage it held over its competitors.

It is hard to say how a Dell acquisition of AMD would affect revenues, but let's just concede that chip volumes would go down and revenues would be nowhere near the $6.5bn from 2010 and you can forget about even the $471m in net income AMD managed to scrape together. The losses would be measured in the billions.

If Dell wanted to do something interesting, it would become a licensee of the ARM architecture and start building its own chips for tablets, clients, and servers. And that would cost a heck of a lot less than buying AMD, which has a market capitalization of $5.8bn.

Yes, Dell, AMD, and Perot Systems are all from the Lone Star State, and Dell and AMD both hail from the Austin, Texas area. So there is a lot of geographical compatibility. But it seems highly unlikely that Michael Dell would spend something on the order of $7bn to $8bn to buy a chip maker that would completely alienate it from Intel. Dell is far better served having Intel and AMD grind against each other and offering better chips at lower prices.

In a conference call with Wall Street analysts today going over its fourth quarter of fiscal 2011 financial results, Dell, the man, was asked about the acquisition strategy of Dell, the company.

"I think it will be very similar to what you have seen us do," Dell explained, adding that the company likes to do small deals where it can find a product it doesn't have and push it through its sales channel and squeeze some profits out of it through its supply chain.

Perot Systems, at $3.9bn, was a bit of an exception, just like IBM's acquisitions of Lotus and Cognos were. (IBM has a very similar acquisition strategy to Dell). If Dell could get IBM to buy the ClearPath mainframe business from Unisys, it is conceivable that Dell might acquire Unisys. (This deal would have made more sense many years ago, when Unisys was providing support for Dell products).

In any event, what Dell, the man, said sure does not indicate that Dell, the company, wants to buy AMD, no matter what the silly chatter on Wall Street is going on about. They're all hat and no cattle. ®

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