Reaction to news of AMDâ€™s acquisition of ATI Technologies on Monday included a thumbs down from Fitch Ratings as the agency revised the companyâ€™s outlook from positive to negative.
The deal worth $5.4 billion ($4.2 billion in cash and 57 million shares of AMD stock) was frowned upon by the agency. It stated that AMD now had limited flexibility for financing due to high levels of debt and that the deal poses a risk to the cash flow of the company.
If the deal goes ahead, the chip maker would assume a debt of $2.5 billion from Morgan Stanley. This would pose a risk for the firmâ€™s cash flow due to higher interest payments. The agency forecast the cash flow to be around negative $400 million to $600 million.
The pressure for the operating cash flow will be further exacerbated, given that the firm was expected to spend $1.7 billion and $2.5 on capital expenditure for 2006 and 2007 respectively.
While the firm believes the ATI acquisition will help in the long and intermediate term, it believes it will continue to be susceptible to the significant pricing power of Intel Corp. in the processor market.
Fitch also expected that Intelâ€™s manufacturing â€œto drive down average selling prices (ASPs) for microprocessors, resulting in potentially meaningful margin compression for AMD.â€
The credit downgrade would affect $390 million of total debt for AMD.