Market, Partners Positive On 'Fabless' AMD

Advanced Micro Devices 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.

Next: Good News For Upstate New York

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 Sunnyvale, Calif.-based 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 Tuesday, 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.

"This is the direction they've kind of been pushed to go in, but you look at the details and it sounds like they've got a good plan. This allows the people working at their factories to stay there and it gets the debt off of AMD's balance sheets," McCarron said.

Many analysts agreed that AMD's core business should now be freed up to focus exclusively product design and marketing, but McCarron noted that the Foundry Co. should also be in a good position to leverage AMD's leading edge process technology to gain more customers and keep its fabs at full capacity.

"The real trick to this market is that you need to keep [fab] utilization at around 100 percent," McCarron said.

One new foundry customer for the AMD-ATIC joint venture could turn out to be graphics chip maker Nvidia.

"There's no reason to think we wouldn't make wafers for Nvidia," AMD's Tom Sonderman, who is set to become VP of manufacturing technology at Foundry Co., told ChannelWeb Tuesday. "Do keep in mind that Foundry Co. has equal ownership between ATIC and AMD, so they will have some influence on which customers we want to do business with."

Next: Benefits For Partners, Large And Small

Sonderman said Foundry Co.'s first order of business "is to serve the IBM ecosystem."

"This is the real reason IBM is so enthusiastic. We'll be able to serve other partners in the IBM alliance with new process technology. This [joint venture] allows us to bring economies of scale to market and it allows us to go head-to-head with TSMC and others in the foundry space," he said.

White box builders and system integrators were less concerned with the manufacturing implications of AMD's big move and more interested in the potential for a streamlined AMD to deliver competitive hardware products.

Calling the ATIC deal "a smart move," Todd Swank, VP of marketing at Burnsville, Minn.-based Nor-Tech, said AMD would now be free to focus on what it does best, which is design new chips.

"New fabs are very, very expensive," Swank said. "And AMD is going against a competitor with all the money in the world. This gives them flexibility, and keeps them from being tied up with all those fixed costs."

Nor-Tech's business with AMD isn't as brisk as it was three years ago, but Swank said he was encouraged by their current roadmap.

"We just introduced a portable server cluster using their Barcelona chips. So we expect good things from them going forward," he said.

AMD's survival is important, said Andy Kretzer of Bold Data Technology, in part to keep market leader Intel on its toes.

"In this marketplace, we need stable competition for Intel," said Kretzer, director of sales and marketing at the Fremont, Calif.-based system builder. "A lot of system builders felt AMD was not able to compete. We all have been concerned about their stability. Hopefully this puts them on the right footing."

One IT solution provider who asked to remain anonymous had a more basic plea for the new AMD -- pony up some more marketing dollars to the brick-and-mortar channel, please.

"[AMD representatives] still come in and help my people with marketing and development," the solution provider said. "They've always been better at that than Intel. That hasn't stopped. But I can feel that the dollars have not flowed to system builders as freely as they have to e-tailers."

Next: Intel's Already Making Noise

But insiders were not universally positive about the AMD news. John Kistler, owner of St. Louis, Mo.-based J&B Technologies, described the fab spin-off as "a fire sale."

"I could be wrong. But this downturn is pretty harsh and they aren't ready for it," Kistler said. "I think it's [the spin-off] a marriage out of desperation. [AMD] will try to put a happy face on it. Unfortunately the only face that's going to be associated with it is a sad face."

Intel, too, expressed an interest in the ATIC deal as it pertains to the cross-licensing agreement to produce x86-based microprocessors that exists between Intel and AMD. That agreement is set to expire in 2010, said Chuck Mulloy, legal affairs spokesman for Intel.

"Given the agreement we have with them, we will and we are evaluating what we heard today. It does involve our intellectual property rights and we always defend our intellectual property rights," Mulloy told ChannelWeb on Tuesday.

The Intel spokesman said the confidentiality of the terms of the Intel-AMD cross-licensing agreement prevented him from saying what Intel's potential issues with the ATIC deal might be. Mulloy said that Intel had been pushing AMD to agree to make those terms public "for months," but claimed AMD was not willing to do so.

One knowledgeable source contacted by ChannelWeb said any possible Intel dispute over the x86 cross-licensing agreement in terms of the ATIC deal would likely have to do with the actual percentage of AMD's final ownership stake in the Foundry Co.'s manufacturing assets.

AMD for its part said Tuesday that everything about the fab spin-off was in line with its deal with Intel.

"We are completely confident the structure of this transaction takes into account our cross-license agreements. Rest assured, we plan to continue respecting Intel's intellectual property rights, just as we expect them to respect ours," AMD said in announcing the deal Tuesday morning.

Joseph F. Kovar contributed to this article.