Project Overview
In this project, I will assume AMD as a private company and determine a price I would like to pay for acquiring AMD on control basis. My report starts with an introductory analysis of the company and industry, focus on three methods I used to evaluate AMD and all related assumptions to support these methods. After all, I’ll conclude a price I would like to pay to acquire and control AMD on Mar-31-2013. Please read it of more.
This is Gong Chen’s final project of Valuation Model and Practice for summer 2013. Hope you enjoy it!

Company Overview
1. Background
Founded in 1969 and headquartered in Sunnyvale, California, Advanced Micro Devices (AMD) operates as a semiconductor company worldwide. It operates in two segments, Computing Solutions and Graphics. The company designs, develops, and sells microprocessor products, such as central processing units (CPU) and accelerated processing units (APU) for servers, desktop PCs, and mobile devices. Advanced Micro Devices, Inc. also offers embedded processor products for vendors in industrial controls, digital signage, point of sale/self-service kiosks, medical imaging, set-top box, and casino gaming machines. In addition, it provides chipset products with and without integrated graphics processors for desktop PCs and servers, and AMD controller hub-based chipsets for its APUs; and graphics, video, and multimedia products for use in desktop and notebook computers. The company serves original equipment manufacturers, original design manufacturers, system builders, and independent distributors directly, as well as through independent distributors and sales representatives.
2. Historical Financial Performance (See Exhibit 1-3)
Pros:
 Selling, general & admin. expenses have shown a steadily decline in recent years, suggesting AMD was doing great on expenses reducing
 Additional paid in capital increased dramatically in the last five years, which means AMD has constantly revived more and more money than the par value of its shares.
 Asset turnover was relatively high among peers, suggesting AMD's high efficiency at using its assets to generate revenues
 Inventory turnover was significant higher than those of peers, which means AMD has strong sales
 Cash conversion cycle was much lower than those of peers, suggesting AMD could convert its products to cash very quickly
 AMD shows very good overall liquidity

Cons:
 AMD carries too much debt
 Very unstable revenue in the last five years
 EBITDA margin and profit margin were too low among peers
 ROE and ROA were negative in the most recent period, also significant lower than peers’
3. SWOT Analysis
Strength:
 The second-largest maker of processors for personal computers
 Quality and expertise in the APU market
 AMD can do something that NVidia can't do, and that is combining CPU and GPU in an efficient, effective, and attractive manner

Weakness:
 AMD's financial woes are tied to the slowdown in the PC industry

Opportunities:
 Won the rights to production to all three of the next-generation gaming consoles
 Delivering new chips and products this year to expand its product line
 Reducing its dependence on PCs by diversifying in the tablet market and into new server markets
 Taking the future of mobile gaming to the cloud, cloud gaming presents itself as a potential game changer down the road for the company

Threats:
 Demand for AMD’s products is being hurt by slower growth in China and a worsening economic climate in Europe.
 AMD may have lost market share to Intel by refusing to cut prices in order to maintain profitability Industrial Outlook
1. The Industry
Semiconductor companies face constant booms and busts in demand for products. Demand typically tracks end-market demand for personal computers, cell phones and other electronic equipment. When times are good, companies like Intel and Toshiba can't produce microchips quickly enough to meet demand. When times are tough, they can be downright brutal. Slow PC sales, for instance, can send the industry – and its share prices - into a tailspin.
Traditionally, semiconductor companies controlled the entire production process, from design to manufacture. Yet many chip makers are now delegating more and more production to others in the industry. Foundry companies, whose sole business is manufacturing, have recently come to the fore, providing attractive outsourcing options. In addition to foundries, the ranks of increasingly specialized designers and chip testers are starting to swell. Chip companies are emerging leaner and more efficient. Chip production now resembles a gourmet restaurant kitchen, where chefs line up to add just the right spice to the mix.
2. Competitors
For CPU segment: Intel Corporation (NasdaqGS: INTC)
Founded in 1968 and based in Santa Clara, California, Intel Corporation designs, manufactures, and sells integrated digital technology platforms worldwide. The company operates through PC Client Group, Data Center Group, Other Intel Architecture, Software and Services, and All Other segments. It offers microprocessors that process system data and controls other devices in the system; and chipsets, which sends data between the microprocessor and input, display, and storage devices, such as keyboard, mouse, monitor, hard drive or solid-state drive, and optical disc drives; system-on-chip products that integrate its processing functions with other system components, including graphics, audio, and video onto a single chip; wired network connectivity products; and wireless connectivity products. The company also provides mobile phone components comprising baseband processors, radio frequency transceivers, and power management integrated circuits; and mobile phone platforms, such as Bluetooth wireless technology and global positioning systems receivers, software solutions, customization, and interoperability tests. Intel Corporation sells its products primarily to original equipment manufacturers, original design manufacturers, and industrial and communications equipment manufacturers in the computing and communications industries.

For GPU segment: NVIDIA Corporation (NasdaqGS: NVDA)
Founded in 1993 and is headquartered in Santa Clara, California, NVIDIA Corporation, a visual computing company, develops graphics chips for use in personal computers (PC), mobile devices, and supercomputers. The company operates through two segments, GPU and Tegra Processors. The GPU segment offers GeForce for consumer desktop and notebook PCs; Quadro for professional workstations; Tesla for supercomputing servers and workstations; GRID Graphics Modules for industry-standard servers to accelerate virtual desktop infrastructure; and GRID Systems for applications ranging from streaming games to hosting graphics-intensive design applications. The company sells its products to original equipment manufacturers, original design manufacturers, system builders, add-in card and motherboard manufacturers, and consumer electronics companies, as well as gamers, enterprises, and tablet and mobile phone users.

Valuation
1. DCF Approach
1.1 Background for Growth Assumption
The last few years have been a severe struggle for the semiconductor company, and it has been in the red for a lot longer than anyone would have anticipated. At one point, many whispered the word that no investor wants to hear: "bankruptcy." Despite all that, by looking into the company, its competitors, and the industry, I personally believed that AMD could turn around in a foreseeable future based on 4 reasons below.
1. CEO Rory Read has done his best to cope with the ailments, taking the necessary measures to generate cash flow via layoffs, selling the company's headquarters, and creating generous bundling campaigns that have reinvigorated the ailing gaming consumer GPU segment. We can easily see the versatility of management and the willingness to do whatever it needs to do to survive.
2. AMD has won the rights to production to all three of the next-generation gaming consoles, each of which offers unprecedented levels of entertainment. This is a huge achievement for AMD, as most of the developers will now tweak their game engines for AMD’s devices.
3. AMD will be unveiling its GDDR6 equipped GPUs in early 2014, and will be ahead of NVidia by at least 6 months. With a low switching cost and practically no competition for a few months, gamers will feel compelled to buy AMD powered GPUs. But that’s not the end of it.
4. Intel is a vertically integrated company, and develops most of its technology on its own. But GDDR6 standards are being developed by AMD, and Intel will have to model its upcoming Broadwell processors based on AMD’s memory standards. This cross platform adoption would certainly take time to perfect, which should give AMD another head start against its fiercest rival.

1.2 Assumptions for projection (See Exhibit 4)
 Total revenue growth: Based on the background discussed above, I give AMD 1% growth rate for the next year and a 1% step-up for each of the following 4 years. Terminal growth rate is 1%
 Cost of goods sold: the historical data shows stable and constant as % of revenue, I assume 58% which is the mean of the recent five years
 Selling, general and administrative expenses: roughly downward trend can be seen in history, also AMD announced a expenses reducing mission recently, I assume 5% which equals to the lowest point in the last five years minus 10% synergy benefits
 Research and development expenses: assume 26% which is the mean of the last five years
 Depreciation and Amortizations (See Exhibit 5): $800 million in existing PPE and new CAPEX every year were both depreciated under a 7-year MACRS
 Tax Rate: observed 35% from comparable companies
 Capital Expenditure: historical data shows “two-stage” in the last five year, I assume 2.75% which is the mean of the most recent three years
 Net Working Capital: similar to CAPEX, I assume 0.76% which is the mean of the most recent three years

1.3 Comp. for WACC Calculation (See Exhibit 6)

1.4 Calculation & Result (See Exhibit 7)
For the residual period, pick low growth and capital expenditure consistent with residual growth. Then set depreciation equal to the capital expenditure in residual period. By discounting all cash flows of the five forecasted periods including terminal value with WACC, the value implied by total cash flow was calculated as $3405.45. Adding the PV of tax shield from goodwill, we have the total enterprise value as $4093 million. Subtracting the net debt (=total debt-cash), the market value of equity on control basis is $3052 million. 2. Market Comparable
2.1 Comp. Screening

2.2 Calculation & Result (See Exhibit 8)
Here I choose TEV/Revenues multiple to derive the total estimate market value because AMD carries negative EBIT, EBITDA, and EPS in the most recent period. Based on total estimate market value, I calculated the minority value of equity, added 25% control premium of equity. Since there is not a discount for lack of marketability with respect to a controlling ownership position because in most cases the control position is assumed to be marketable, the control value of equity is also marketable value of equity. Finally, from the market comparable approach, the total enterprise value on control basis is $9815.8 and the market value of equity is $6433.8 million.
3. Control Transactions
3.1 Transactions Screening

3.2 Calculation & Result (See Exhibit 9)
Here I choose TEV/Revenues multiple to derive the total estimate market value because AMD carries negative EBIT, EBITDA, and EPS in the most recent period. Since these transactions were one company buys control of another, the values calculated by multiples are on control basis already and no further adjustment needed. From the control transactions approach, the total enterprise value on control basis is $14651.88 and the market value of equity is $13610.88 million. Conclusion
Among these three methods, the market comparable is not that appropriate here because it ignores the future growth of AMD and the company’s revenue fluctuates violently in recent years. Also, the transaction approach is unfavorable in this case because the transaction data I can get is either inadequate or too old. Still, the multiples show hugely “spaced-out” from time to time.
After all, I choose the result brought by DCF approach to conclude this valuation mainly because the DCF concerned the future of AMD. In this way, AMD has a market value of equity of $3052 million as of Mar-31-2013, which is the maximal price I would like to pay to acquire and control the company.