AMD Spins Off Manufacturing Operations

The company hopes the breakup will reverse a string of money-losing quarters and dramatically improve its ability to compete with Intel.
"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.