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AMD, Fujitsu - Pan for the Flash?

When partners AMD and Fujitsu announced their $2.5 billion deal to build a new Flash memory semiconductor company this week, there was little shock.

The two companies have been working together for the last 10 years on a 50-50 partnership known as Fujitsu AMD Semiconductor Limited (FASL). The holding company runs a major Flash memory chip production facility in Aizu-Wakamatsu, Japan.

The new company will be called FASL LLC (AMD will take a 60 stake. Fujitsu will maintain 40 percent) and use 7,000 employees to create the second largest Flash provider with 19 percent market share (rival Intel holds 27 percent of the market).

But what is surprising is the lukewarm reception that the Sunnyvale, Calif.-based semiconductor maker and the Tokyo-based concern have gotten from analysts and investors

When Credit Suisse First Boston analyst Tim Mahon reported the spinout of AMD's Flash business was "imminent" two weeks ago, the news caused a pop in both AMD and Fujitsu stocks. That buzz has since cooled off.

"Typical merger risks aside, today's news is seen as a positive for AMD, which generated about one-fourth of last year's $2.7 billion in sales from flash memory. However, the company doesn't score enough net profit on flash to excite investors," said Motley Fool analyst Jeff Fischer.

The move is also a little sketchy considering the market for Flash memory in 2001 was an estimated $10 billion, but the chips are increasing becoming a commodity. Two-thirds of AMD's revenue comes from its processors. One-third comes from its Flash memory business.

Analysts with Deutsche Bank Securities Tuesday called the deal "much ado about nothing" saying that the most comparable arrangement in the industry is the Elpida DRAM company between NEC and Hitachi.

"We perceive no actual economic benefits (therefore value creation) from this deal, other than a few savings in operating expenses and back-end manufacturing," the financial analysts said in their report to investors. "Despite the deal having been discussed the past 6-9 months, AMD provided few financial details.

AMD said it would begin to post financial details of the deal in the third quarter of 2003. The timing coincides with the partnership's official launch.

"It's not a huge financial change, but there is a huge accounting change," In-Stat/MDR analyst Kevin Krewell told internetnews.com.

Krewell says the new company does make sense and has some other long-term benefits like creating a physiological aura in the memory market.

"This is only going to help AMD and Fujitsu become as stronger competitor and move up in market position," said Krewell. "They are in better shape to challenge Intel because they appear as one stronger brand, rather than as two lesser brands."

One other suggestion, is that AMD is shifting its Flash memory operations around to eventually split it off from its core semiconductor business.

"That is a possibility, but not in the short-term" said Krewell. "What they want to do now is put this company in place and figure out what this company can do before they discuss splitting off. There is synergy in the two company's products under the FASL partnership. That might be a problem if AMD split it off as a totally separate strategy."

Under the new partnership, AMD will contribute its Flash memory group to FASL LLC including its Fab 25 in Austin, Texas, R&D center known as the Submicron Development Center (SDC) in Sunnyvale, California, final Flash memory assembly and test operations in Thailand, Malaysia, and China. Fujitsu will contribute its Flash memory business division and its Fujitsu Microelectronics (Malaysia) (FMM) final assembly and test operations.

The new company also has a marketing arrangement whereby the new company will sell Flash memory products through AMD and Fujitsu and their respective sales forces. AMD CEO Hector De Ruiz said new FASL products and brands would be announced closer to the launch date.

The timing issue was also critical to the announcement considering that AMD is expected to launch its 64-bit Opteron server processors later this month. Krewell says AMD needs to keep an edge and a momentum at this time in the face of Intel's Itanium push.

"They needed to get this announcement out of the way," said Krewell. "It's going to be a transition for a time and they need to prepare for their Opteron launch. The new company is expected to come just before the release of their 64-bit Athlon chips.