AMD Spins Off Manufacturing Operations

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Analysts and AMD partners reacted positively to news of the deal that will split Sunnyvale, Calif.-based AMD into two entities: a designer and marketer of AMD and ATI-branded computer products, and a new venture dubbed the Foundry Company, which will own and operate AMD's current semiconductor manufacturing assets.

Advanced Technology Investment Co. (ATIC), a government instrument formed in the United Arab Emirates capital of Abu Dhabi, will own 55.6 percent of the Foundry Co., with AMD retaining 44.4 percent ownership, according to a statement by the chip maker. Voting rights in the joint venture will be split 50-50, AMD said.

ATIC is to pay AMD $700 million for its stake and the new Foundry Co. would assume $1.2 billion of AMD's debt. Another Abu Dhabi party, UAE-owned Mubadala Development Co., will acquire 58 million, newly issued AMD shares for $314 million plus warrants to buy another 30 million, increasing Mubadala's stake in AMD from 8.1 percent to 19.3 percent.

Industry analysts praised AMD for simultaneously shedding a massive debt burden from its shaky books and positioning both its design side and the new Foundry business for solid runs at future competitiveness.

"It takes [AMD] off the death watch list, and makes them a real player," said Enderle Group principal Rob Enderle. The San Jose, Calif.-based industry analyst also predicted that the move would "initially level the playing field substantially" between AMD and its much larger rival, microprocessor market share leader Intel Corp. of Santa Clara, Calif.

"What this does is make the AMD side a lot more agile. It allows them to focus on the future. The fab investments are necessarily done on a five-year strategic basis even as you also have to perform on a quarterly basis," Enderle said.

"This changes AMD from a company that was going out of business in the next couple of years to one that's in it for the long term," he added.

Investors, too, were bullish on the day of the deal's announcement, with large volumes of NYSE-traded AMD stock being shifted last week on an opening of $5.27 per share. That price hit a high of $5.56 in the very early going before settling in to close at $4.59, an 8.51 percent gain for AMD on a day which saw competitors like Intel drop 5.38 percent and Santa Clara, Calif.-based Nvidia Corp. fall 7.77 percent.

Bullishness on AMD could be attributed to the chip maker's seemingly magical escape from the weight of seven straight quarters in the red, made even bleaker by the wider economic downturn, said Roger Kay of Endpoint Technology Associates Inc.

"It's a great move for AMD. I'm kind of thinking of it as a kind of Harry Houdini move. You couldn't imagine them getting out of where they were," said the Wayland, Mass.-based analyst.

The Foundry Co., to be chaired by former AMD CEO Hector Ruiz with AMD's senior VP of manufacturing operations Doug Grose serving as CEO, will take over AMD's main manufacturing facilities in Dresden, Germany and is expected to go ahead with building a new fabrication plant in upstate New York's Saratoga County, which had been uncertain due to AMD's long-standing financial difficulties.

Even as AMD is reportedly set to downsize about 3,000 current employees as part of the deal, the Saratoga County facility would create 1,400 direct manufacturing jobs and an additional 5,000 new jobs in the fab's vicinity, according to Nigel Dessau, chief marketing officer at AMD. Dessau said those projections were based on AMD's observations of job growth at and around its Dresden facilities.

The move is the culmination of AMD's self-coined "Asset Smart" strategy. Industry watchers have anticipated some form of fab sell-off by AMD for more than a year, but until the announcement, AMD executives had bobbed and weaved on the when, the how and the who.

"We didn't want to simply find any partner, but the right partner," Dessau said. That turned out not to be a larger company with its own stake and expertise in semiconductor manufacturing, like Samsung or the Taiwan Semiconductor Manufacturing Company (TSMC), but rather long-term investors from a region with plenty of sand but not much history of converting it into silicon.

"We were looking for an investor that had patient capital, that could invest in a long-term, five-year roadmap, and address both the needs of AMD and the needs of worldwide demand for semiconductor products," Dessau said.

Such a hands-off investor means AMD might well get to have its cake and eat it too, said Dean McCarron, principal analyst at Mercury Research.

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