AMD Picks up SeaMicro to Strengthen Server Market Offering

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Advanced Micro Devices

AMD (NYSE:AMD) recently stated that it will acquire SeaMicro for a payment of $334 million. ((AMD to Acquire Server Start-Up, The Wall Street Journal, Feb 29 2012)) SeaMicro builds micro servers that essentially pack together several chips to save space and energy. [1] AMD’s attempt comes as a result of company’s consistently poor performance compared to Intel (NASDAQ:INTC) in the server market over the past few quarters. Going forward, this market is going to get even more competitive as companies such as Nvidia (NASDAQ:NVDA) and others enter with ARM-based server chips. Therefore AMD is looking to leverage this acquisition to gain server processor market share as soon as it can.

See our complete analysis for AMD

Server Market Is Critical For AMD

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The server market is lucrative. Data consumption over the Internet is growing and is being driven as media and retail commerce shifts to online platforms. There are growing needs for cross-country collaboration for companies, increased cloud computing capabilities and infrastructure to support the growing number of Internet users. Servers are required to handle data traffic, and the market for server microprocessors will continue to grow at a healthy rate even in the face of slower PC demand. As such we believe this business will become critical for AMD, and the company currently has very low market share in the server microprocessor market — and hence plenty of room to grow.

We estimate that currently the server business constitutes just about 12% to AMD’s stock value.

AMD’s Intent With Acquisition

Currently SeaMicro sources its processors from Intel. Even if AMD replaces all of Intel’s chips, the incremental share gains will be minimal. However this acquisition will provide AMD with the technology to assist other server makers so that they can offer the same technology and features. In the process, AMD will have the opportunity to improve its relationship with these server makers and push its own server chips into the market.

Our price estimate for AMD stands at $9.16, implying a close to 30% premium to the market price.

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