A.M.D. to Split Into Two Operations
By ASHLEE VANCE
Published: October 6, 2008
Advanced Micro Devices plans to announce Tuesday that it will split into two companies — one focused on designing microprocessors and the other on the costly business of manufacturing them — in a drastic effort to maintain its position as the only real rival to Intel.
In addition, the company said two Abu Dhabi investment firms would inject at least $6 billion into the two firms, mostly to finance a new chip factory that A.M.D. planned to build near Albany, N.Y., and to upgrade one of the company’s existing plants in Dresden, Germany.
A.M.D., based in Sunnyvale, Calif., makes graphics, computer and server processors. It will own 44.4 percent of the new entity, which has been temporarily named the Foundry Company, a reference to the technical term for a chip factory. The Advanced Technology Investment Company will own the rest.
Advanced Technology, which was formed by the Abu Dhabi government, has promised to put up $2.1 billion immediately and contribute $3.6 billion to $6 billion more to build or upgrade chip fabrication plants, also known as fabs. A.M.D. said the two companies would share voting control equally.
The Mubadala Development Company, an Abu Dhabi company that bought 8 percent of A.M.D. in November, will pay $314 million for 58 million newly issued shares, increasing its stake in the presplit company to 19.3 percent. It will also get warrants to buy 30 million shares. A.M.D. stock closed Monday at $4.23 a share, down 30 cents.
“We generally believe this deal is a game changer for the industry,” said Khaldoon Al Mubarak, chief executive of Mubadala. “It’s bold, and I think it’s smart.”
Coming up with the billions of dollars needed to construct each new chip plant has proved to be a huge drain on A.M.D., the perennial No. 2 to Intel in the market for microprocessors, the powerful chips that control the functions of personal computers and the larger corporate machines known as servers. As of June, A.M.D. reported that it had $5.3 billion in debt and just $1.6 billion in cash.
With the constant need to devise smaller, faster, more energy-efficient chips to keep up with Intel, A.M.D. was forced to turn to outside help.
“This is the biggest announcement in our history,” said A.M.D.’s chief executive, Dirk Meyer. “This will make us a financially stronger company, both in the near term and in the long term, as a result of being out from the capital expense burden we have had to bear.”
The semiconductor industry faces constant consolidation because of the amount of investment required to create ever finer components on semiconductors. In addition, chip makers tend to experience significant financial fluctuations as they adapt to shifts in manufacturing processes.
But executives from both Abu Dhabi investment groups expressed optimism that they’re buying into what is overall a growth business.
“Yes, it is a cyclical business, but over time the trajectory is always upwards,” said Waleed al-Mokarrab, chairman of Advanced Technology.
The transaction, which A.M.D. expects will close in early 2009, must be approved by shareholders, regulators and officials in New York and Germany who oversee government subsidies for the local chip plants.
A.M.D. said Foundry would manufacture processors for A.M.D. as well as other customers. This will place the new entity in competition with a host of companies, many of them in Asia, that produce chips designed by other firms.
The breakup of A.M.D. is a major shift in the processor landscape, leaving Intel as the only significant maker of PC chips to still design and build its own products. Such an arrangement is often seen as an advantage since it allows the chip maker to align new products with the latest advances in manufacturing technology.
The split, which has been in the works for more than a year, did not come easily to A.M.D. According to company lore, A.M.D.’s co-founder and longtime chief executive, W. J. Sanders III, known as Jerry, once remarked that “real men have fabs.”
Under the deal proposed by A.M.D., the company would retain many of the traditional benefits of fabs, since part of Foundry will be dedicated to serving A.M.D. and will remain in close communication with the company’s engineers.
“We feel like we’re still pretty manly at A.M.D.,” Mr. Meyer said. Noting that Mr. Sanders made his quip over a decade ago, he added, “Frankly, the math has changed.”
A.M.D. owns a pair of plants in Dresden. One of them is already state-of-the-art, but the other is undergoing a conversion that will let it produce processors for other companies as well as A.M.D.
With the cash infusion, A.M.D. said it was now committed to moving forward with plans, first announced in June 2006, to build a huge $3.2 billion chip fab in Malta, N.Y., north of Albany.
The plant, which will be owned by the new manufacturing company, will employ about 1,400 workers and is expected to get about $1.2 billion in incentives from the State of New York.
I.B.M., which also has chip plants in the state, has extended a technology pact with A.M.D. to 2015.
A.M.D. will count $700 million of the $2.1 billion from Advanced Technology as payment for its stake in the foundry company. Foundry will also assume $1.2 billion of A.M.D.’s debt.
Reply With Quote
Originally Posted by gb_trock
Bookmarks