Microsoft Could Buy AMD And It'd Make Sense, Piper Jaffray Says

• Microsoft Corporation MSFT shares are up 4 percent in the last six months, but down 8.43 percent since August 17.
• Piper Jaffray’s Katherine R. Egbert maintained an Overweight rating for the company, with a price target of $53.
• Although Microsoft acquiring Advanced Micro Devices, Inc. AMD appears unlikely, such a deal would be dilutive to the former’s CY16 earnings, Egbert stated.

Analyst Katherine Egbert mentioned that reports of a potential Microsoft bid for Advanced Micro Devices have surfaced again. Advanced Micro Devices provides semi-custom x86 based processors to Microsoft for the Xbox and to Sony Corp (ADR) SNE for the PlayStation.

Piper Jaffray noted, “AMD also provides a graphics chip for the latest generation Wii. (Intel produces >95% of the CPUs that run personal computers; Microsoft has ~90% share of the market for PC operating systems, hence the close relationship and term 'Wintel'. AMD competes with Intel in this market.”

Such a deal is unlikely in view of the implications for Wintel. Egbert added, however, that this deal “would be consistent with the recent beefing up of chip design talent by other large tech vendors.”

Such a deal will also provide protection and a clear path for the development of Xbox, an ARM architecture license and some data center technology, Egbert stated.

Microsoft has adequate cash resources to make a deal without using its stock, the analyst mentioned. She added, “An all-cash purchase at a 20% premium would be $0.01 dilutive in CY16. Given AMD's declining market share, we don't think the asset would command much of a premium.”