AMD cancels debt deal with Lehman Brothers

AMD, the world's No. 2 microprocessor maker, said the bankruptcy of Lehman Brothers Inc. forced the company to unravel a complicated deal with the investment house that would have protected AMD shareholders from dilution when buyers of $2.2 billion in AMD debt eventually try to cash in their convertible shares.

Dilution happens when companies issue new shares of stock, which reduces each investor's share of the company.

AMD's debt offering, from April 2007, was a survival move. The company had to raise money to stay afloat as it bled cash from its acquisition of graphics-chip maker ATI Technologies and a bruising price battle with Intel Corp.

AMD said in a regulatory filing Friday that because of Lehman Brothers' bankruptcy, the bank defaulted on the so-called "capped call" transaction and that AMD could no longer count on it to prevent dilution.

The deal was supposed to work like this: AMD paid Lehman Brothers $182 million to scoop up enough AMD shares before 2015, when the convertible senior notes come due, so that it could hand those shares back to AMD and cancel out the new shares that would flood the market when the senior notes were converted into shares of stock.

AMD, like other Lehman creditors, is trying to recover its money. AMD still has options, though, for reducing dilution from the debt offering, including buying back shares on its own. Now might be a good time: AMD shares are trading at lows they haven't seen since the early 1990s.

AMD shares finished Friday's trading up 4 cents at $2.27. In early 2006, when AMD was riding high off big market-share gains against Intel, the stock traded above $40 per share.

Intel's resurgence and AMD's pricey acquisition of ATI has devastated the company's balance sheet. AMD has since changed CEOs and announced plans to spin off its factories into a separate company to save money.