AMD to Spin Off Manufacturing

AMD and chips
Source: Reuters

U.S. chipmaker Advanced Micro Devices said it plans to spin off its manufacturing plants into a joint venture with Abu Dhabi to get a cash injection and shrink debt to better compete against larger rival Intel.

AMD’s (NYSE: AMD) shares soared 31 percent on the news on Tuesday, after Wall Street has waited for months for the struggling chipmaker to formulate its so-called “smart asset” strategy aimed at letting the company invest more in developing chips and less in costly factories.

Advanced Technology Investment Company (ATIC), an Abu Dhabi state-owned venture capital company, will invest at least $5.7 billion, getting a 55 percent stake and half the board seats. AMD will own the rest.

Another Abu Dhabi government company, Mubadala Development Co., will spend $314 million to increase its stake in AMD to 19.3 percent from 8.1 percent and gain a seat on AMD’s board, AMD said in a statement.

“Today is a landmark day for AMD, creating a financially stronger company with a tightened focus,” Dirk Meyer, president and chief executive officer of AMD, said in the statement.

AMD has lost market share to Intel (NASDAQ: INTC) and in the last few years was forced to weigh the price of its pride in owning the semiconductor fabricating plants, or “fabs,” which most other chipmakers gave up long ago.

AMD has also been hit by problems with its high-end personal computer and server Barcelona chip, and had bumps along the road after acquiring graphics chipmaker ATI. The European Commission has charged Intel illegally paid computer manufacturers and retailers to avoid AMD.

The new venture, temporarily called Foundry Company, will assume all $1.2 billion of AMD’s manufacturing operations debt so the remaining company can compete hard against Intel, which sells about 80 percent of the central processing units at the heart of the world’s 1 billion PCs. AMD makes the rest.

AMD shares jumped to $5.55 in premarket trading from their Monday New York Stock Exchange close of $4.23, though the stock remains far below its 12-month high of $14.73.

New factory

The 3,000-person Foundry Company will make all of AMD’s central processing units as well as chips for other companies. It plans to break ground next year for a factory in upstate New York, employing 1,400 people, if New York state will transfer financial incentives to the new company.

The chief executive will be Doug Grose, senior vice president of technology at AMD, and its new chairman will be Hector Ruiz, now chairman of AMD and its former CEO.

The joint venture will upgrade an existing AMD plant in Dresden, Germany, and build the plant in New York to the latest technology standards, AMD said. It said the Foundry Company, which will be on AMD’s balance sheet, may ultimately build a fab in Abu Dhabi.

ATIC will invest an initial $2.1 billion, paying $700 million directly to AMD. After that, it will invest an additional $3.6 billion to $6 billion over five years.

ATIC Chairman Waleed Al Mokarrab said on a conference call that this was his company’s first major investment and “though owned by the Abu Dhabi government, ATIC will be directed by commercial principals that will generate commercial returns.”

Mubadala, which holds stakes in sectors ranging from energy to aerospace, purchased an 8.1 percent share of AMD in 2007 for $622 million. It will boost that stake to 19.3 percent by buying 58 million newly issued shares and warrants for 30 million more.

The deal is to close at the end of 2008 or early in 2009, if approved by stockholders. It will also be reviewed by the U.S. government inter-agency Committee on Foreign Investments in the United States (CFIUS).

The deal will be welcomed by IBM, which has worked closely with AMD and other chipmakers to improve chips. The company will be part of the IBM technology alliance, making it easier to build chips for members.

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