Analyst: AMD may spin off fab plants this month

Manufacturing operations could be spun off into a new company funded out of Middle East

A Wall Street analyst is predicting that Advanced Micro Devices Inc. is preparing to spin off its manufacturing operations into a separate company and may announce the plan as soon as Sept. 15.

John Lau, senior semiconductor analyst and managing director of Jefferies & Co., told Computerworld this week that AMD is looking to spin off its fabrication plants into a separate company funded by a Middle East consortium. The company, according to Lau, will handle AMD's manufacturing but will also be free to build chips for other companies.

AMD may maintain a minority interest in the new company, added Lau.

The analyst also noted that by splitting off its manufacturing operations, AMD could improve its financial standing.

The chip maker struggled during 2007, taking it on the chin with delayed product releases, financial woes and a slip in market and mind share. This year, AMD has regained its footing somewhat, as the company shipped a slew of new products. But the looming need to upgrade its fab facilities carries a hefty price tag that would add a major financial burden.

"We believe that given the current cash position of the company and the capital expenditures necessary to upgrade their current fabs, this will create a hardship for the company," said Lau. "The company has [been] on the record indicating they will pursue a fab-light strategy. We have been looking for more details of this strategy for quite some time now, and our contacts in Asia indicate this effort is near finalization. We believe that the spin-out will result in divestiture of their wafer fabrication capabilities but they will retain their packaging and test operations."

Gary Silcott, an AMD spokesman, said the company will not respond to rumors.

"We've been clear that when we're ready to talk about further details of [AMD's Asset Smart strategy], we will do so," he said. "We hope to talk further about it by the end of the year."

Earlier this year, AMD hinted that it may change its asset strategy to lighten what Wall Street analysts have said is a heavy financial burden on the company. "At a high level, Asset Smart is our broader strategy to take a close look at how we're doing our wafer manufacturing and our chip manufacturing, the research and development," Silcott said today. He added that the company is evaluating "everything associated" with how it produces products -- what it should be doing itself and what it should be doing jointly with others.

And a series of executive shakeups in recent months have had analysts and industry watchers expecting a restructuring. In April, the company announced that Phil Hester, senior vice president and chief technology officer at AMD, resigned to search for new opportunities. The next month, AMD shuffled its top executives and created a new group to oversee the company's product road map.

Then in July, the company named Dirk Meyer to replace Hector Ruiz as CEO -- just as AMD was reporting its seventh consecutive quarterly loss.

All the executive movement has led to rampant speculation that a major change is afoot for AMD. And splitting up the company would fit that bill.

"It seems that the winds are blowing in that direction," said Jim McGregor, an analyst at In-Stat in Scottsdale, Ariz. "My concern is that if they get rid of manufacturing, they're going to say they don't need to focus on new process development technologies. That kind of expertise is critical to their long-term competitiveness, either against Intel or other market segments. If they lose that, I'd be concerned. That could be a short-term gain but a long-term loss."

Dan Olds, principal analyst at Gabriel Consulting Group, said he would be concerned if AMD does split off its manufacturing operations.

"So much of their business is based on how well or poorly they can execute in manufacturing -- not just CPUs, but GPUs too," he added. "I would think that, given how critical this is to their business, that it would not be in their best interest to give up control over this part of their business model. It'll give them a short-term financial gain, but it will definitely make their future road maps more risky in my mind."

Lau, however, doesn't see the move as negative for AMD.

"We believe that, like with Intel, controlling your own manufacturing capabilities is very important, especially for leading-edge processing technology," said Lau. "However, we believe this is a luxury that AMD can now not afford. We believe this spin-off of the fabs is a much welcome change to their balance sheet and improvement in cash flow."

He added that it would be very difficult for AMD to maintain its investment in chip design while tackling the needed upgrades to its fabs. One fab, for instance, would require an investment of $2 billion, according to Lau, to enable it to manufacture 45-nanometer chips and 12-in. wafers. He added that AMD's current cash on hand is only $1.1 billion.

Copyright © 2008 IDG Communications, Inc.

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