(AMD) Advanced Micro Devices Eyes SeaMicro

In a bold move to boost its position in next-generation servers, chipmaker Advanced Micro Devices Inc. (AMD) announced that it will acquire microserver start-up SeaMicro for $334 million, of which approximately $281 million will be paid in cash.

This would mark Advanced Micro’s first major acquisition under its new CEO Rory Read. The company expects the deal to increase its appealing to data center operators.

SeaMicro, based in Sunnyvale, California, makes energy-efficient servers that are used in data centers for cloud computing. It uses Intel (INTC) chips in its next-generation servers, which offer dramatic reductions in power and space usage.

Recent industry reports suggest that out of the total energy supply in 2011, more than 2.5% was being used by data centers. Hence, efficiency remains a major concern for IT companies. SeaMicro’s technology dramatically reduces the power consumed by servers, while increasing compute density and bandwidth.

The acquisition of SeaMicro will boost the company’s offerings for cloud computing providers with a range of processor choices that reduce data center complexity and energy consumption.

Cloud computing has changed the dynamics of the data center and increased server usage. In fact, using the cloud has a number of benefits, the most significant of which is the cost advantage from sharing resources. This has, in fact resulted in its increased adoption across various industries. SeaMicro’s networking fabric allows hundreds of low-power processors to work together, saving both cost and time. However, proper management and usage of the technology is a prerequisite.

The cloud computing market is expected to grow at a CAGR of 40.0% from 2010 to 2015, crossing $7.0 billion in revenues by 2015. According to the market research firm IDC, cloud data centers are projected to be the fastest growing segment of the server market through 2015. Cloud computing leads to improved services and elevated security requirements for companies that use it and the acquisition should help Advanced Micro tap this opportunity for long-term benefit.

Advanced Micro plans to offer the first Opteron processor-based solution that combines its technology with SeaMicro’s technology, in the second half of 2012. Hence, the acquisition is expected to be accretive to earnings only after 2012 and not in the near term.

However, most of Advanced Micro’s business is in chips for PCs that don’t have a meaningful presence in smartphones and tablets. In order to stay ahead of rivals like Intel and NVIDIA Corp (NVDA), we believe Advanced Micro also needs to enter these emerging markets.

Advanced Micro shares currently carry a Zacks Rank of #3, implying a Hold recommendation in the short term (1–3 months).

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