Will AMD's Big Deal Pay Off? Patience, Young Grasshopper!

Advanced Micro Devices (NYS: AMD) just made a nifty deal, and investors are loving it. Shares jumped as much as 4.7% on the news that microserver specialist SeaMicro is about to become AMD property.

SeaMicro builds server systems of the extremely power-efficient variety. These systems may not run Mass Effect 3 any faster than a single-chip desktop, but they're very efficient at serving up virtual servers, web servers, and cloud farms -- tasks where parallel processing on lots of chips makes sense.

It's all relative
This very specific type of server system plays to a pretty small crowd today. HP's efforts aren't even off the ground yet. SeaMicro's revenue has not been disclosed, but AMD admits that it paid top dollar for the company, indicating a rather tiny market. But it's a high-growth opportunity, as Intel predicts the microserver class becoming 10% of the server market in 2015.

A $334 million cash-and-stock deal may not be huge in absolute terms, but its AMD's biggest deal since the 2006 acquisition of graphics powerhouse ATI by a long shot. Other than shuffling manufacturing plants between partners and subsidiaries, the company's biggest buy in the last five years was a $6.4 million minority investment in Android software developer BlueStacks.

Serving with the enemy
All three systems in its portfolio today are built around Intel (NAS: INTC) processors, ranging from 64 server-class Xeon chips to 768 Atom processors. (No, that's not a typo -- I told you "lots of chips," right?) SeaMicro claims massive savings in power draw and floor space by cramming a box full of chips made for netbooks and smartphones.

AMD promises to support the Intel systems "as we should," according to global business units VP Lisa Su. But in the long run, you'll definitely find AMD's own Opteron chips here instead, and maybe even the company's mobile Brazos chips. Look for the first AMD-powered SeaMicro systems by the end of 2012.

But that's just a temporary step. In the end, this is less about SeaMicro's direct system sales and more about baking its hugely scalable technology into everything AMD does. Su wants to take advantage of SeaMicro's "technology building blocks" and let system vendors "add their software and system capabilities, which are really their special sauce, on top of what we do. They can build systems on top of our basic technology."

This way, AMD avoids stepping on the toes of major customers. You may recall that Hewlett-Packard (NYS: HPQ) in particular didn't take it well when Cisco Systems (NAS: CSCO) decided to start building servers. Sayonara, long-standing partnership. Hello, hated new rival. Some analysts still fear that AMD will trip over similar landmines. HP, for one, is already looking into SeaMicro-style servers with ARM (NAS: ARMH) chips inside. Given HP's whimsical management style in recent years, it's hard to say whether the company sees fresh competition in AMD's plans or just another technology asset to exploit.

Making a flashy splash
So AMD makes a relatively big and certainly bold move deeper into the server market, while Intel is busy drumming up interest in its flagging smartphone chips. Does the SeaMicro deal signal a sea change in the server market?

Perhaps in the long term, but not right away. AMD chips away at the server space with more traditional products in the meantime. The biggest potential catalyst for this stock in 2012 and 2013 may not touch the data center at all: Forbes reports that Sony could slap AMD processors into its next PlayStation console. AMD's Fusion architecture should play well with the blended processing needs and tight confines of a gaming console.

This deal is a direct play on the cloud computing revolution that is reshaping IT as we know it. To find out whether AMD's SeaMicro-powered servers will fly or fail, add the stock to your Foolish watchlist. You won't miss a beat as the story unfolds.

At the time thisarticle was published Fool contributor Anders Bylund holds no position in any of the companies mentioned. The Motley Fool owns shares of Intel and Cisco Systems. Motley Fool newsletter services have recommended buying shares of Intel. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinion, but we all believe that considering a diverse range of insights makes us better investors. Check out Anders' holdings and bio, or follow him on Twitter and Google+. We have a disclosure policy.

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