If AMD’s market value increases by more than one-third, Intel can argue the TFC deal is a change of control, allowing them to terminate AMD’s x86 license.
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Market Cap as Market Value
While there were quite a few assumptions taken in the asset calculations from the last article, market value, and how it is applied by investors and courts, is even fuzzier, but we can ball park a few numbers. AMD’s market value, if we consider it as reported for a stock investor, also called market capitalization, would be about $1.29 billion.
Mubadala will be buying 58 million shares at the lower of 2.13 cents (the average of the 20 closing prices in the days leading up to Dec 12) or the average of the 20 closing prices in the days before the deal closes. If the deal closed last weekend, the extra 58 million shares would increase AMD’s market value by less than $125 million.
Mubadala is also getting 35 million warrants for AMD stock. Even if we treat these as fully converted (i.e.: at what they would be worth if used and turned into shares) that would add less than $75 million to AMD’s value, for a total increase of less than $200 million, or about 15%. Because this system of valuation is based on share price times number of outstanding shares, and the 58 million shares plus 35 million warrants, if converted, would be about a 15% increase in outstanding shares, this calculation of value can’t get up to the one third increase Intel needs to argue a change of control and cut AMD’s license to make AMD chips.
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Enterprise Value as Market Value
Another system of calculating market value, which when calculated this way is also called enterprise value, is
It may not make immediate sense to add market capitalization to long-term debt and subtract cash, but it represents what you would have to pay to buy out all of a business’ shareholders and long-term creditors (be the only owner and not owe any money), less the cash that you would get along with the company, since you can use that to offset what you spent on the business.
With this method, we would have a starting value of
(607.190 million X 2.13) + 4.874 billion – 1.341 billion = 4.826 billion
AMD is transferring $1.2 billion of debt to TFC, but AMD owns 34.2% of TFC, so the amount of debt they no longer own works out to $790 million. Market cap is affected as above with an extra $200 million, but we’ll take $125 million back out because AMD is getting it in cash (we’re ignoring the penny per warrant, or $350 thousand, AMD would get from Mubadala for converting the warrants)
As with assets, market value, at least in this interpretation, actually goes down.
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What if AMD’s Share Price Goes Up or Down?
If AMD’s share price drops they will get less cash, but even if their share price falls to zero, which would prevent the TFC deal under all kinds of other provisions, the before and after TFC enterprise values would be $3.533 and $2.743 billion respectively, again a drop. The amount of debt going out is even more significant relative to the incoming cash (or lack thereof) when you factor in the shrinking market cap as AMD’s share price drops.
Since Mudabala is paying the lower of the recent average or average share price before the transaction, and only paying this on the shares and not the warrants, the market cap can go up without being canceled out by the cash that gets taken off (recall formula (i)), and the debt transfer would make up a smaller reduction, relative to the market cap. But again, the new shares and warrants represent approximately a 15% increase in market cap. Even if the share price increases to the point where we could totally disregard the debt and cash components, that would just get us back to the market cap as market value scenario above.
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Arguing Change of Control
So, in market value as in assets, AMD isn’t likely to be found undergoing a change of control for the purposes of Section of their x86 licensing deal with Intel. Again, the x86 license has many blacked out areas, we made many assumptions, used numbers that were probably developed with lots of assumptions, and we’re not lawyers. We also applied certain simplifications, such as ignoring executive stock, option, and warrant packages, since they would not have had a large enough impact to reach the one-third threshold.
The next article discusses if AMD’s x86 license will apply to TFC, at least in so far as AMD’s own chips are concerned, or if Intel can argue TFC is a third party.
CFIUS, ESD, and Possibly Even Intel Have a Say in AMD Spinning Off Its Manufacturing Business
With numerous approvals needed from investors and regulators, and possible legal issues tied to the x86/x86-64 cross-license agreement with Intel, AMD's spin-off plans to create The Foundry Company need more than a rubber stamp. Who is for it, who doesn't mind, about whom we aren't sure, and why?