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Why You Shouldn't Bet on a Takeover of AMD

Any potential buyer will quickly find itself negotiating with a third party: Intel.

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Shares of chipmaker Advanced Micro Devices are rising by more that 4 percent today in the wake of a report in Chinese media speculating that it could be the target of a buyout by the China-based chip firm BLX IC.

AMD would seem a tempting target. Its shares have fallen by more than 60 percent in three years, and even after today’s rumor-based rally, the company is valued at about $2 billion, making it a relatively inexpensive target for a potential acquirer.

But there is one really big reason that you should not put much trust in these rumors just yet: Its name is Intel.

AMD has long been a competitive irritant to Intel, though less so in recent years as its chips for PCs and servers have become ever less competitive to Intel’s. But the most important fact concerning their relationship is this: AMD has a long-term license to use the crown jewels of Intel’s intellectual property, the x86 instruction set, and this agreement is one of AMD’s most important assets.

The x86 instruction set dates back to the days when Intel-made chips going into PCs made in the 1980s and 1990s were known by numbers and not names. There was the 386, then the 486, which evolved into the Pentium line, and now the Core processor line. It’s basically a set of fundamental rules that tell the chip how to behave, and thus has a lot to do with what makes a PC a PC. (And since Apple adopted Intel chips in 2006, this applies to the Mac, too!)

AMD has operated with a license to use the x86 instruction set for decades, negotiated only at great difficulty. (See the book “Inside Intel” by Tim Jackson for the epic history on this subject.) Terms of the license agreement are confidential, and it’s technically a cross-license as Intel uses some AMD patents too, but even so, it’s pretty clear that those rules are strict and ironclad, and they have frequently brought Intel and AMD to serious legal loggerheads.

For instance, when AMD sought to spin off its manufacturing operations and create the company now known as GlobalFoundries, Intel cried foul, saying that AMD could not extend the license to a third party. AMD might have been prevented from executing on a strategic move that essentially saved it from financial oblivion: At the time, those expensive factories were dragging it down.

The cross-licensing agreement was last extended in 2009 at a series of deeply contentious meetings in Maui between AMD’s lawyers and Andy Bryant, Intel’s longtime CFO and now chairman. The meetings involved a mediator, San Francisco lawyer Antonio Piazza, who had helped the companies strike a similar deal in the mid-1990s. The deal formed a portion of the settlement of an even more complicated antitrust lawsuit AMD had brought.

That instance illustrates the extent to which Intel would quickly assert itself as a third party in any takeover talks between AMD and a potential buyer. Intel would essentially have the right to veto a buyout because it could easily cancel the x86 license, making AMD fundamentally less attractive to own. It would be no easy deal to conclude. And even if Intel did approve, the license is subject to occasional renewal. Some years down the road, Intel could simply refuse to engage in any renewal talks with the new owner.

The prospect of complicated negotiations alone is probably enough to scare off a potential acquirer. So don’t bet any money on an AMD buyout until there’s a formal offer on the table and Intel has signaled it is unlikely to stand in the way. Until that happens, these rumors are just that: Rumors.

This article originally appeared on Recode.net.