AMD scrambles to raise capital but risks long term company health

In July of last year, AMD and ATI merged to form one of the largest semiconductor companies. The cost of the acquisition was an enormous burden for AMD: $5.4 billion USD. Analysts at the time said that the acquisition would be a bad move for AMD, noting that the chip company would be better off plunking the large amount of cash in other core businesses like micro processors.
Of the $5.4 billion that it took to purchase ATI, AMD borrowed roughly $2.5 billion in loans and combined with $1.2 biillion common stock. The acquisition not only cost AMD much of its available principle but also left it in heavy debt. At the time, AMD did not disclose plans of how it would pay off the debt. In fact, two months before the confirmed acquisition of ATI, AMD announced that it would be spending $5.8 billion USD into the development of fabs in Dresden, Germany.

Last week, AMD announced that it will offer Convertible Senior Notes to investors in an attempt to raise roughly $2.2 billion. However, unlike common stock purchases, Convertible Senior Notes put AMD further into debt -- in this case, another $2.2 billion USD. Using Convertible Senior Notes, investors profit since the notes can be converted to common stock once AMD is performing well.

Using Convertible Senior Notes, AMD can receive usable cash now, but not have to worry about paying back its investors until its common stock reaches a predefined price. In this case, AMD set the conversion point to be $42.12 USD per share but its current price is roughly $14. In the catastrophic event that AMD goes bankrupt, Convertible Senior Notes take priority over other debts and thus bond investors are guaranteed the return on their investment.

With excellent market performance from rival Intel, AMD posted a painful first quarter loss of $611 million USD this year. AMD is now left with roughly $1.1 billion in the bank; a figure that has analysts worried.

Nicholas Aberle, Senior Vice President of Equity Research, Caris Company, states, "AMD is still spending a good clip.  Without borrowing the company could run out of cash by late Q3, early Q4."  Arberle adds, "[AMD] needed to raise capital just to keep the doors open."

Raising capital is only part of the equation so far.  Last month, AMD announced plans to restructure the company and to cut $500 million USD in capital spending in order to feather off some of its financial woes. While the strategy may prove to be helpful in the short term, cutting back on capital spending eats into new facilities and R&D. 

In addition, cutting expenses is not an easy task in the middle of a fierce price war. AMD announced large cuts across its high-end processors earlier this April, following Intel's cuts just last week.

Both companies are expected to further slash prices as AMD debuts its Barcelona processor family this summer.

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