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Analysis: Still a long road ahead for AMD

Posted: 10 Oct 2008 ?? ?Print Version ?Bookmark and Share

Keywords:foundry? AMD plan analysis? joint venture?

Christmas came a bit early for Advanced Micro Devices Inc. this year.

With one stroke of the pen, the chipmaker deftly improved its cash position, lops off about one quarter of its $5 billion debt, relieves itself of the hefty capital expense burden required to maintain a competitive manufacturing operation and gains a joint venture partner whose pockets are deep enough to fearlessly launch a new chip foundry in a turbulent financial market.

Little wonder AMD executives indulged in a bit of hyperbole while announcing details of the microprocessor and graphics ICs vendor's asset-lite manufacturing strategy on Tuesday (Oct. 8).

"This event, [and executive chairman Hector Ruiz's] vision will go down as certainly the most important transaction in the history of AMD, and one of the most important in the history of the semiconductor industry," said AMD president and CEO Dirk Meyer during a conference call.

Certainly, AMD's decision to spin off its manufacturing facilities in a joint venture with Abu Dhabi's Advanced Technology Investment Co. (ATIC) qualifies as the most significant event in AMD's existence. It's debatable, however, whether the transaction rises to the level of other seminal events in the history of the semiconductor industry.

In any case, future events and the evolution of its competitive position will determine whether or not AMD's decision to outsource manufacturing was the best option for dealing with chief competitor Intel Corp., which has demonstrated convincing ability to shove its rival into a tight corner.

Complex issues
While AMD gets immediate financial relief through the deal, the company must now deal with another set of complex issues related to its minority position as a chip maker. It must still manage the difficulties of spinning off its foundry business while simultaneously realigning its operation to refocus on product development and marketing, areas where it was also lagging against Intel.

The complex $8.4 billion transaction involves the creation of a new semiconductor foundry out of AMD's manufacturing facilities through a joint venture to be majority owned by government-controlled ATIC. The latter will control 55.6 percent of the new company. AMD will own the remaining interest and immediately become its largest customer.

As part of the agreement, ATIC will pay $2.1 billion to acquire a majority stake in the new foundry, which will be based in the United States, and pay $700 million of the amount directly to AMD while investing $1.4 billion in the joint venture. ATIC has also agreed to invest between $3.6 billion and $6 billion in the joint venture foundry over the next five years, according to executives at the two companies.

Furthermore, another Abu Dhabi entity, the Mubadala Development Co., will raise its stake in AMD to almost 20 percent by paying $314 million for 58 million new AMD shares and "warrants for 30 million additional shares," the companies said.

Investors and analysts were encouraged with the company's latest moves. The shift to R&D and product development could help AMD remain in the computer processing business, according to Doug Freedman, an analyst with American Technology Research.

"We can say without a doubt that AMD has answered the question of how it will stay in the CPU race with leading-edge process technology," Freedman said in a report. "The cash infusion, debt off-load, reduction in R&D expenses, operating cash flow and long-term capital commitment must lay to rest all investor concern regarding access and control of future process technology."

Investors appeared to agree, pushing up the company's stock price rose in intraday trading on Tuesday (Oct. 7). The company's depressed stock price surged more than 21 percent, to a high of $5.56 before retreating slightly to approximately $5.14, still sharply ahead of the previous day closing price of $4.23.

- Bolaji Ojo
EE Times

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