Market, Partners Positive On 'Fabless' AMD

Nautilus Science & Technology News
By: Marco Ayllon
Dallas October 7, 2008

Advanced Micro Devices (NYSE:AMD) finally pulled the trigger on a company-changing move that the technology industry had been expecting for months, announcing Tuesday that it will spin off its manufacturing operations in a multi-billion dollar joint venture with a newly formed high-tech investment company created by the government of Abu Dhabi.
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 on Tuesday praised the Sunnyvale, Calif.-based chip maker 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 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."

Investors, too, were bullish at the outset of the deal's announcement, with large volumes of NYSE-traded AMD stock being shifted Tuesday 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 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

"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.