A lot of people may think that stock market analysis belongs solely to financial media, and that we should not cover this kind of analysis. However, we are from a different opinion. Financial market matters – a lot.
Issuing new stock is the cheapest way for a company to finance its expansion, as the company does not need to pay interest on the money they got from the stock issue. The company may pay dividends over the stock, but this is up to the company – the company isn’t obliged by any governing body to pay dividends and they may not pay any dividends at all, if they wish.
People will only buy the company’s stock if they think they will make money. Let’s be honest. Nobody will buy AMD stock only because they like green or only because they saw AMD logo on a Ferrari Formula 1 racing car. They want money in their pockets, through increase on the stock price and/or through dividends payment.
So if the market isn’t seeing a particular stock as a good stock for buying, the company may sell less stock than they had planned to when issuing new stock, frustrating their plans.
The price of a stock is an opinion of the people on the stock market on how much the company is worth at a given time. Multiplying the stock price by the number of issued stocks we have how much the market thinks the company is worth, i.e., at that particular time, how much money is needed to buy all the stocks. This is called market capitalization or simply market cap.
The stock price and the market cap are the two metrics we are going to analyze, because we were interested to know how much money an individual investor like you could make (or lose) if you had invested on AMD and also because we wanted to know how much the market thought AMD was worth before and after it bought ATI.
We are going to take a look at four particular dates: July 21st, 2006, the Friday before AMD publicly announced its intention to buy ATI; July 24th, 2006, the day AMD announced its intention to buy ATI; October 24th, 2006, the last day of ATI stock trading; and July 20th, 2007, last Friday, one year after AMD had first announced that it would buy ATI.
The scenario for ATI stock was the following. On July 21st, 2006 it closed at $16.56, closing at $19.67 on July 24th, 2006 after AMD announced that they would buy ATI. That was an impressive 19% increase on the company stock price, however you have to keep in mind that at the closing of the deal (which happened Oct 25th, 2006) AMD would buy each ATI stock paying $16.40 cash plus 0.2229 shares of AMD stock for people still holding ATI stock. Since AMD closing price on July 24th was $17.39, each ATI stock was actually valuated at $20.28 ($16.40 + $3.876, which is $17.39 x 0.2229), so even with this price increase it was still quoted a little bit below its ”real“ value.
On the day the deal was closed, Oct 25th, 2006, ATI was valuated at $5 billion ($19.53 closing price on Oct 24th, 2006 times 258.26 million outstanding shares). AMD paid $4.2 billion in cash for it plus gave away 57 million AMD shares. Keep these numbers.
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Figure 1: ATI stock performance.
And how about AMD? On July 21st, 2006 it closed at $18.26. On July 24th, 2006 it closed at $16.90, an 8% loss on the day AMD announced it would buy ATI (what is quite intriguing is that on July 20th, 2006 AMD closed at $21.65, suggesting that people knew what was going to happen). On October 24th, 2006, last day of ATI stock trading AMD stock closed at $20.32. And last Friday AMD closed at $15.50.
So if you had bought AMD stock on the day it announced they would buy ATI, you would have 8.3% less money today. If you had bought AMD stock on the day it finished buying ATI (October 25th, 2006) you would have 25.60% less money today.
On the last business day before AMD announced it would buy ATI it was a company worth $9 billion, and one day before it was worth $10.65 billion, two times more than ATI. On the day it announced it was buying ATI, its market value dropped to $8.3 billion (values based on 492 million outstanding shares). And today, one year later, AMD is worth only $8.5 billion (value based on 550 million outstanding shares).
This is the math we can’t understand. AMD bought a 5 billion dollar company, paid 4.2 billion dollars in cash for it and instead of becoming a $15 billion company the market says that today the company is worth less than when it started the merger process. Once again, two business days before announcing it was going to acquire ATI, AMD was worth $10.65 billion, its value dropped to $9 billion on the day before the announcement and today it is worth $8.5 billion.
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Figure 2: AMD stock performance.
But this story is even more intriguing when we analyze what happened to NVIDIA and Intel during the same time period.