Prudential on AMD antitrust suit
AMD ANTITRUST SUIT VS. INTC: IMPOSSIBLE TO CALL THE OUTCOME,
Source: Prudential Equity Group, LLC
Author: M.LIPACIS 415-395-2603
Date: 07/06/2005
AMD ANTITRUST SUIT VS. INTC: IMPOSSIBLE TO CALL THE OUTCOME, BUT NEAR-TERM
IMPLICATIONS POTENTIALLY POSITIVE FOR AMD (Part 1 of 3)
PRUDENTIAL EQUITY GROUP July 6, 2005
Semiconductors
----- ANALYST(S) -------------------- -------- OPINION -------
Mark Lipacis 415.395.2603 Current: Favorable
James Lucier 202.327.8481 Prior: --
Jesse Tortora 415.395.2602
All important disclosures can be found at the end of this report under the
section entitled Important Disclosures.
----- HIGHLIGHTS ------------------------------------------------------------
* We hosted a conference call with antitrust attorney Glenn Manishin, to
discuss the antitrust complaint that AMD filed against Intel. He offered the
following perspectives:
* AMD's goal of bringing the case to trial within 18 months appears
aggressive - two or more years may be more realistic.
* While the suit builds upon the Japan FTC findings, AMD will likely have to
prove them again in US courts.
* INTC has a robust antitrust compliance program in place - lowers the
probability of a "smoking gun".
* Expect AMD to subpoena OEM's records (e.g. email) and have them provide
testimony that can be used in court.
* Impossible to handicap the outcome at this point - AMD may not be able to
prove its claims, and some tactics used by INTC may be viewed as permissible in
the courts.
* Near-term implications/milestones (6-8 months): 1) potential restraining
impact on INTC, 2) potential for a preliminary injunction against INTC, which
if granted, could prevent INTC from engaging in some of its pricing practices,
3) request for dismissal by INTC.
* We think investors should focus on the near-term impacts, which appear
positive for AMD, in our view.
* We remain Overweight AMD with a $25 price target, and Neutral weight INTC
with a $31 price target.
----- DISCUSSION ------------------------------------------------------------
Last week, AMD filed a private antitrust case against rival chipmaker INTC in
federal court. To better develop a framework for understanding the
implications of the lawsuit on AMD and INTC's stocks, we hosted a conference
call with Glenn Manishin, partner at the law firm Kelley, Drye and Warren LLP.
Mr. Manishin specializes in technology policy and antitrust litigation and
has represented clients such as Netscape, Oracle and Google. Prior to
becoming a partner at Kelley Drye, Mr. Manishin served as antitrust counsel to
MCI, and trial attorney with the US Department of Justice, Antitrust Division.
He holds a J.D. from Columbia Law School. In this note, we discuss takeaways
from the call.
Basis of Lawsuit: A "Meat and Potatoes" Monopoly Maintenance Case
AMD's suit alleges antitrust violations under Section 2 of the Sherman Act,
Sections 4 and 16 of the Clayton Act, and relevant provisions of California
law. Essentially, it is a monopoly maintenance case against Intel and includes
elements of exclusionary acts and discriminatory pricing to obtain and preserve
power. In other words, AMD has charged INTC with committing unilateral acts to
unlawfully preserve a monopoly.
According to Mr. Manishin, the justification for any antitrust case is the
preservation of consumer welfare. In this case, the primary customer described
as being directly harmed is the OEM. AMD argues that it has been isolated from
certain customers, geographies, and market segments and that in the absence of
these barriers, the OEMs would have access to more choices and lower prices.
AMD has requested injunctive relief, which if successfully proven by AMD and
granted by the court, would bar INTC from the alleged exclusive dealing and
discriminatory pricing practices. AMD has also requested unspecified monetary
damages, which potentially could amount to several hundred million dollars.
Examining the Legal Process: Trial Could be Years Away
Private antitrust cases can take years to conclude and will often settle after
years of litigation. Mr. Manishin expects a long, drawn out process and
believes that AMD's goal of bringing the case to trial within 18 months is
aggressive - a period of two or more years may be more realistic. Mr. Manishin
sees the key milestones in the legal process as follows:
* Motion to Dismiss (0-8 months). INTC will first have the opportunity to
stop the case before it goes to trial with a motion to dismiss. Discovery can
proceed, but frequently it is halted while the court decides whether the case
is good enough to get into discovery. Most antitrust cases are not resolved
on a motion to dismiss because in making its decision the court assumes that
the case that AMD presented to be true, and a good lawyer will typically get
past this stage.
* Discovery (immediate - up to 24 months or more). If the motion to dismiss
is unsuccessful, the pre-trial discovery process begins. It is during the
discovery process where the evidence comes out through depositions and
subpoenas for documents such as emails. Discovery can be very expensive and
time consuming, hundreds of depositions, thousands of documents, and in some
cases can last several years. For example, in AOL vs. Microsoft, discovery
lasted two years before they settled, and they weren't close to finishing the
discovery process.
* Summary Judgment - Dismissal (after discovery starts, as early as 6-8
months). Some time after discovery has started, INTC will have the right to
ask for a summary judgment to dismiss the case. Unlike an initial motion to
dismiss, where the court assumes AMD's representation of the facts is accurate,
the summary judgment will be based on facts that have come from the discovery
process to determine if there's a material dispute that needs to be resolved by
a jury.
* Temporary Injunction Against Intel (as early as 6-8 months). After
discovery has started, AMD will have the opportunity to request a temporary
injunction against Intel based on information gathered during discovery. AMD
will not have to prove that they can win the case, but that there's a
likelihood of success, and that in the interim, that harm would fall on them.
If granted, a temporary injunction could prevent INTC from engaging in some of
its pricing practices or exclusive dealing until the trial concludes.
* Trial by Jury (starts in 24 months or more). Finally, if the case goes
to trial, a jury would rule on facts as presented and would be responsible for
awarding damages. If INTC's acts were determined to be unlawful, the jury
would be instructed to award AMD damages sufficient to put AMD in the same
market position as it would have been in had it not been for the unlawful acts.
* Out of Court Settlement (anytime). Given that neither the Federal
Department of Justice, nor States' Attorneys General have joined the case
against Intel, there is less of a political element, and therefore the case has
a higher probability of settling out of court. According to Mr. Manishin, over
90% of these cases settle out of court.
How Much will the Japan Findings Help?
In March of this year, the Japan Fair Trade Commission (JFTC) deemed INTC's
practices on retroactive rebates and cash payments for exclusive use, as unfair
methods of competition. INTC did not agree with the findings, but it did agree
to modify its practices. Mr. Manishin believes that while the US suit builds
upon the findings of fact by the JFTC, AMD will likely have to prove them again
in US courts. According to AMD's CEO, Hector Ruiz, the JFTC findings helped to
encourage AMD to file the US antirust suit.
AMD could pursue relief from European Union separately from the US courts.
Typically, procedures in Europe work faster than in the US and European courts
have been known adopt a stricter stance when it comes to anticompetitive
practices.
INTC Appears to Have a Robust Antitrust Compliance Program
According to Mr. Manishin, Intel has a robust antitrust compliance program in
place and has had an excellent record of compliance over the years. This is
consistent with our own checks that indicate the company has had an antitrust
compliance program for management for over a decade. The company has relied on
its Washington counsel and has used its power in a way in which the courts
permitted. The threat of antitrust suits at any time has meant that Intel has
always had to be sensitive about internal communications, terms of deals, and
any other conduct that might have anti-competitive implications. The robust
antitrust compliance program lowers the potential of a "smoking gun" from INTC,
however, does not eliminate it.
Expect AMD to Get Help from OEMs - Willing or Not
AMD included a number of quotes from former industry executives in its original
press release. Here are two of the more colorful examples:
* Then-Compaq CEO Michael Capellas said in 2000 that because of the volume
of business given to AMD, Intel withheld delivery of critical server chips.
Saying "he had a gun to his head," he told AMD he had to stop buying.
* According to Gateway executives, their company has paid a high price for
even its limited AMD dealings. They claim that Intel has "beaten them into
'guacamole'" in retaliation.
While compelling, these quotes would be considered hearsay, unless the
executives make the same statements under oath at a trial or in depositions
presented as evidence. Moreover, while it would be considered powerful
evidence if a current of former OEM executive were to take the stand, it is
unclear that they will wish to discuss proprietary trading arrangements in
court. Note that none of Microsoft's customers testified against the company
during its case. We do expect, however, AMD to subpoena OEMs to hand over
documents (e.g., email) and to provide testimony that can be used in court.
Impossible to Handicap the Outcome Without Knowing the Facts
At this point, Mr. Manishin does not think it is possible to judge whether AMD
can win its case and whether Intel will incur civil penalties or injunctive
restraints against its marketing and pricing practices. Price discrimination
and exclusive arrangements are not illegal as such, but INTC will have to show
there was valid business logic and economic rationale other than restraint of
trade that was behind them.
Law permits the use of economic power if it is related to scale economies or
business efficiency. In contrast, economic power is prohibited if it is used
for restrictive or anticompetitive purposes. To illustrate, if a company
acquires and maintains monopoly power by superior business acumen, it is not
liable because it was lawfully obtained. However, if a company obtains
monopoly power and uses it in a way that is exclusionary or anticompetitive to
maintain power, it could be held accountable for unlawful monopolization.
The bottom line is that at this point we don't know if the claims presented in
the case are true, and even if they are, some may be viewed as permissible in
the courts.
(Continued in Part 2)
First Call Corporation, a Thomson Financial company.
All rights reserved. 800.347.7822
AMD ANTITRUST SUIT VS. INTC: IMPOSSIBLE TO CALL THE OUTCOME, (Part 2 of 3)...
Source: Prudential Equity Group, LLC
Author: M.LIPACIS 415-395-2603
Date: 07/06/2005
AMD ANTITRUST SUIT VS. INTC: IMPOSSIBLE TO CALL THE OUTCOME, BUT NEAR-TERM
IMPLICATIONS POTENTIALLY POSITIVE FOR AMD (Part 2 of 3)
PRUDENTIAL EQUITY GROUP July 6, 2005
Semiconductors
----- ANALYST(S) -------------------- -------- OPINION -------
Mark Lipacis 415.395.2603 Current: Favorable
James Lucier 202.327.8481 Prior: --
Jesse Tortora 415.395.2602
All important disclosures can be found at the end of this report under the
section entitled Important Disclosures.
----- HIGHLIGHTS ------------------------------------------------------------
* We hosted a conference call with antitrust attorney Glenn Manishin, to
discuss the antitrust complaint that AMD filed against Intel. He offered the
following perspectives:
* AMD's goal of bringing the case to trial within 18 months appears
aggressive - two or more years may be more realistic.
* While the suit builds upon the Japan FTC findings, AMD will likely have to
prove them again in US courts.
* INTC has a robust antitrust compliance program in place - lowers the
probability of a "smoking gun".
* Expect AMD to subpoena OEM's records (e.g. email) and have them provide
testimony that can be used in court.
* Impossible to handicap the outcome at this point - AMD may not be able to
prove its claims, and some tactics used by INTC may be viewed as permissible in
the courts.
* Near-term implications/milestones (6-8 months): 1) potential restraining
impact on INTC, 2) potential for a preliminary injunction against INTC, which
if granted, could prevent INTC from engaging in some of its pricing practices,
3) request for dismissal by INTC.
* We think investors should focus on the near-term impacts, which appear
positive for AMD, in our view.
* We remain Overweight AMD with a $25 price target, and Neutral weight INTC
with a $31 price target.
----- DISCUSSION ------------------------------------------------------------
Focus on Near-Term Implications
We think that investors should focus on the near-term implications of the case:
1) According to Mr. Manishin, the mere existence of an antitrust case can have
a restraining impact on the defendant while case is pending. INTC will not
only face increased attention from regulators, but also may have to defend
itself in the court of public opinion. While we think the case has potential
to disrupt customer relationships of both companies, INTC is clearly the
company with most at stake.
2) AMD has already requested injunctive relief, but Mr. Manishin suspects that
AMD will pursue a preliminary injunction, which if granted by the court, would
prevent INTC from engaging in some of its exclusive dealing and pricing
practices. In order to receive this preliminary injunction, AMD will have to
convince the court that a) its case has likelihood of success because INTC's
actions are exclusionary over a large portion of the market, and b) it stands
to be harmed if INTC maintains these practices. If a preliminary injunction is
ordered, it is conceivable that it could happen within a six to eight month
timeframe.
Netting it out, without regards to the merits of the case, we view the suit as
a near-term positive for AMD. The antitrust suit means Intel will likely be
tried not just in a Delaware courtroom, but also in the court of public
opinion, and therefore has the potential to put Intel on the defensive. This
potentially could enable AMD to force a re-opening or expanding of
relationships at PC OEMs (whether or not they were closed off by legal or
illegal means) - just as it expands its capacity by 35%-40% in 2006 (our
estimate) and hits the
sweet-spot of its Opteron and Turion product cycles.
Valuation and Risks
AMD ($17.45, Overweight) Valuation. Our $25 price target is based on 18 times
our CY06 EPS estimate of $1.25 plus a $2.20 for AMD's ownership in the pending
Spansion carve out. Our 18x multiple is consistent with an approximate 20%
premium to a pre-bubble median P/E multiple of 15x, Intel's P/E. We believe
that Intel's multiple better represents that of a pure-play microprocessor
business. We also believe that a 20% premium to that multiple is appropriate
given the current low interest rate environment.
AMD Risks. Mainly Intel. AMD competes with INTC, a formidable,
well-capitalized competitor with a dominant market share position. Risks
associated with competing with INTC include increasing price and product
competition, which could result in missed earnings estimates. Other risks are
associated with the flash memory business, which accounts for about 40% of the
company's revenues. The flash memory market is a commodity business whose
pricing environment can be characterized as aggressive. Tougher than expected
competition in this market could result in a lower profitability profile for
AMD.
INTC ($26.21, Neutral Weight) Valuation. Our price target is $31, which is
based on 18 times our 2006 GAAP EPS estimate of $1.71. This is consistent with
an approximate 20% premium to the company's pre-bubble median P/E multiple,
which we believe is appropriate given the current interest rate environment.
INTC Risks. 1) Valuation. INTC is trading at premiums to its average
historical valuation metrics. We've argued that the premium is justified due
to the low interest rates, but there is a risk that the valuation multiples
could contract if interest rates rise more than expected or the semiconductor
sector's fundamentals deteriorate. 2) Corporate Earnings May Not Track
Forecasts. S&P 500 earnings are another key indicator of corporate IT
spending. Our positive investment thesis on Intel is based in part on
positive growth in corporate earnings. If that growth fails to materialize,
then our revenue and earnings forecasts would be at risk.
Bio of Glenn B. Manishin, Partner, Kelley Drye and Warren LLP
GLENN MANISHIN is a partner with the national law firm of Kelley Drye & Warren
LLP, resident in the firm's Tysons Corner, Virginia office. His legal practice
concentrates on telecommunications and technology policy, antitrust and
commercial litigation. A pioneer in the synthesis of law and public policy for
technology companies, Mr. Manishin has represented numerous technology clients
- including Netscape, Oracle, Google, Excite@Home, Tellme, Echelon, Travelocity
and others - on such cutting-edge issues as software antitrust, cyber security
and Internet regulation, privacy, standards, spam, domain name competition,
Internet gaming and taxation, broadband access and universal service. His
practice also encompasses capital structuring and transactional issues for
mature and emerging growth technology ventures.
Antitrust law has long been a centerpiece of Mr. Manishin's career. He was the
principal author of the landmark February 1999 White Paper by the Software &
Information Industry Association proposing a divestiture remedy for the United
States v. Microsoft antitrust litigation. He served as counsel for the Project
to Promote Competition and Innovation in the Digital Age (ProComp) and the
Computer & Communications Industry Association - along with former Judges
Robert Bork and Kenneth Starr - in connection with the government's antitrust
case and appeals. Mr. Manishin is also handling a number of ground-breaking
antitrust lawsuits in the telecom sector arising out of the relationship
between regulation and competition in network effects industries.
Mr. Manishin has participated in virtually all of the most important
regulatory, judicial and legislative proceedings affecting telecommunications
and the Internet for the past two decades. He was one of a handful of lawyers
selected by the United States Court of Appeals for the Eighth Circuit in St.
Louis to present oral argument in Iowa Utilities Board v. FCC, the first
federal appeal of the FCC's local competition rules implementing the
Telecommunications Act of 1996, and by the Third Circuit in Philadelphia in
Prometheus Radio Project v. FCC, a high-profile challenge to the FCC's 2003
deregulation of broadcast and mass media concentration rules. He was
instrumental in lobbying for the 1996 Act, in which he successfully
represented the Computer and High-Tech Coalition in securing an amendment that
limits the FCC's standards-setting powers in computer-related markets, and in
subsequent FCC and appellate cases opening local telephone networks for
Digital Subscriber Line services and broadband Internet access. Mr. Manishin
serves as outside counsel for several telecommunications trade associations,
including the Association for Local Telecommunications Services (ALTS) and the
International Prepaid Communications Association (IPCA). He serves in
addition as pro bono counsel for such public interest organizations as
Consumers Union, the Consumer Federation of America and Computer Professionals
for Social Responsibility.
Before joining Kelley Drye, Mr. Manishin was a partner with Patton Boggs LLP
(1999-2001) and a Washington, DC telecom boutique (1990-99). He is a former
partner with Jenner & Block, antitrust counsel to MCI, and trial attorney with
the US Department of Justice, Antitrust Division. He served as a member of the
US Access Board's Telecommunications Accessibility Advisory Committee in
1996-97, and as a member of the North American Numbering Council, an advisory
committee to the FCC, as well as the NANC's Legal Expertise Working Group, in
1997-99.
Mr. Manishin has written and lectured frequently on telecommunications and
technology policy, appearing as a commentator on such national media as CNN,
CBS, MSNBC, Bloomberg, PBS, Fox News and NPR as well as in the Wall Street
Journal, New York Times, USA Today and Business Week. His publications include
articles on convergence of the communications and computer industries, the AT&T
divestiture and the role of the First Amendment in cable television.
Mr. Manishin is admitted to the California, District of Columbia and Virginia
Bars, and is a member of the American Bar Association and the Federal
Communications Bar Association. He holds a J.D. from Columbia Law School,
where he was Notes & Comments Editor of the Columbia Law Review, and a B.A.
cum laude from Brandeis University.
AI
