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Analysts: Spin-off puts AMD back in the fight with Intel

Wall Street welcomes news that a Middle East firm is taking a load of debt off AMD's back

October 7, 2008 12:00 PM ET

Computerworld - By splitting off its manufacturing operations into a separate company, Advanced Micro Devices Inc. could be on track to become the nimble, innovative company that once had Intel Corp. on the run.

AMD this morning announced plans to spin off its manufacturing operations into a separate company. With this dramatic turn, struggling AMD not only rids itself of the financial burden of running fabrication plants, it gains a hefty influx of cash from its partner in the deal, Advanced Technology Investment Co. (ATIC).

"I don't think this will give us a whole new AMD, but the industry will be dealing with an AMD that's a good deal more nimble because they won't be dealing with the same financial burdens or dealing with the fab plants," said Dean McCarron, president of Mercury Research in Cave Creek, Ariz. "Because this lowers the break-even point for AMD, it gives them staying power in the market and will help them focus on design and sales again."

Early in the decade, AMD had grabbed a solid footing in the semiconductor market. Its success was a key reason for Intel's stumbles between 2003 and 2005. But come 2006, Intel responded with a reorganization that curbed AMD's momentum. After that, AMD stumbled under the financial burden of acquiring ATI Technologies Inc. and the delay of its Barcelona chip.

Both McCarron and Dan Olds, principal analyst at the Gabriel Consulting Group, said simply getting a big chunk of debt off its back could help the chip maker regain some of the fire that once had it nipping at rival Intel's heels.

"It's like the old AMD after a spa and rehab vacation," said Olds. "They've come back stronger financially and in better shape overall. They're still the same company and they still [partially] own their fab operations. It's like they got a rich uncle to help them out."

Word of the spin-off was welcome news to Wall Street, which responded by lifting AMD's stock by 18% this morning -- at the same time that the Dow had dropped by 200 points, noted John Lau, a senior semiconductor analyst and managing director at Jefferies & Co., who predicted the spin-off early last month.

Lau said the spin-off of the fab operation is a necessary move for AMD. "This fab spin-out changes the equation on how to remain competitive," he said. "Now it's a design race."

The new offshoot business, which is being temporarily called The Foundry Co., will be co-owned by AMD and ATIC, which is owned by the government of Abu Dhabi in the United Arab Emirates. ATIC will shell out $2.1 billion -- $1.4 billion going to the new company and the rest going straight to AMD, according to AMD.



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