AMD Spins Off Manufacturing Operations

Advanced Micro Devices on Tuesday announced that it would spin off its manufacturing operations into a new company, a breakup that the chipmaker hopes will reverse a string of money-losing quarters and dramatically improve its ability to compete with rival Intel.

AMD would hold a minority stake, 44.4%, in the new company, temporarily called the Foundry Co. The Advanced Technology Investment Co., formed by the Abu Dhabi government, would hold the remaining 55.6%. AMD, however, would have equal voting rights with ATIC, since the company board would be equally divided between the two companies.

The deal is expected to help AMD meet its critical need to reduce costs following a string of quarterly losses that have amounted to several billion dollars. Along with sharing control over manufacturing facilities with AMD, ATIC would pay the billions of dollars needed to continue with plans to expand AMD's fabrication facilities in Dresden, Germany, and build a new fab near Albany, N.Y., which would employ more than 1,400 people. AMD's Austin, Texas, manufacturing operations also would be turned over to ATIC, which would be headquartered in Silicon Valley.

Under the deal, ATIC would pay $2.1 billion for its stake in the new company, with $700 million of that money going to AMD to purchase its share. In addition, the new entity would take over $1.2 billion in AMD debt.

Over the next five years, ATIC has committed to spending from $3.6 billion to $6 billion to expand and improve the new company's chip-making capacity, which also could be used to make processors for other companies besides AMD. In doing so, the company would become a competitor of a host of manufacturers, many in Asia, that build processors designed by other firms.

The agreement also has Mubadala Development, owned in part by the Abu Dhabi government, increasing its stake of AMD to 19.3% from 8.1% with the purchase of an additional 58 million shares and warrants for 30 million more for $314 million.

AMD has been working on its breakup, which the company called its "Asset Smart" strategy, for more than a year. The initiative was an answer to Wall Street's demands for radical change to reverse the company's losses, much of which was attributed to competing against Intel and paying off the huge debt incurred with the 2006 acquisition of graphics chipmaker ATI Technologies.

"Today is a landmark day for AMD, creating a financially stronger company with a tightened focus," Dirk Meyer, president and chief executive of AMD, said in a statement. “With the Foundry Company, AMD has developed an innovative way to focus our efforts on design while maintaining access to the leading-edge manufacturing technologies that our business needs without the required capital-intensive investments of semiconductor manufacturing."

If the deal closes as expected in the beginning of 2009, AMD would immediately reduce its workforce by about 3,000 people, cut capital expenditures, and redirect more research and development resources to chip design versus manufacturing process design, said John Spooner, analyst for Technology Business Research.

"We believe that the chipmaker will become more competitive as it will be able to concentrate its resources on product design, allowing it to focus on delivering products that are consistently competitive with those of Intel," Spooner said in an e-mail. "A more competitive AMD product line will bring with it higher revenue and profitability for the chipmaker, reversing its recent string of unprofitable quarters."

Analyst Jack E. Gold of J. Gold Associates said the deal is critical for AMD's survival. "It certainly throws them a life preserver that they needed," he said. "They were in significant trouble."

However, to be successful, AMD will still need to come up with more competitive designs against Intel and also make sure the new company closes the gap in Intel's lead in manufacturing processes, Gold said. At the same time, in order to become profitable, the new company will need to fill all its capacity by attracting more customers than just AMD.

"It's not clear who those new customers will be," Gold said. "It could be problematic filling that excess fab capacity."

If the strategy is successful, however, a big loser would be TSMC, a major chip manufacturer that currently makes AMD's ATI graphics processors. AMD is expected to eventually move its ATI manufacturing to the new company.

Winners besides AMD would also include Intel, Gold said. "What it would do is give Intel a viable competitor, and Intel needs a viable competitor to keep its level of innovation high."

The Foundry Co. will join IBM's joint development alliance, which comprises a group of chip manufacturers that pool resources for research and development. AMD has a technology agreement with IBM that it has extended to 2015.