Update: AMD spins off manufacturing to cut costs, raise funds

Company to get new capital from investment funds owned by Abu Dhabi government

Advanced Micro Devices Inc. announced this morning that it is splitting off its manufacturing operations into a separate company to cut costs and get an infusion of capital.

Rumors of a spinoff have been swirling in the industry for the past several months. John Lau, a senior semiconductor analyst and managing director at Jefferies & Co., said last month that by splitting off its manufacturing operations, AMD, which has been struggling financially, could receive a cash injection, while getting rid of the massive expense that comes with updating its fabrication plants.

"We are joining with the Advanced Technology Investment Co. to create a brand new company -- one that epitomizes a new global enterprise with talent and resources from around the world," said Dirk Meyer, AMD's president and CEO, in a conference call this morning. "This will result in a financially stronger and more focused AMD."

The new 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 for the deal -- with $1.4 billion going to the new company and the rest going straight to AMD to buy added shares in The Foundry, according to AMD.

The chip maker also announced that The Foundry will assume about $1.2 billion of AMD's debt.

ATIC will own 55.6% of The Foundry and AMD will own 44.4%. Its board of directors will be equally divided between representatives from AMD and ATIC.

The Mubadala Development Co., also in Abu Dhabi, now is a 8.1% AMD shareholder, but, as part of this deal, will increase its stake to 19.3% of outstanding AMD shares. Mubadala will pay $314 million to AMD for 58 million newly issued AMD shares and warrants for 30 million additional shares.

Although AMD will be The Foundry's first customer, it will build chips for other companies as well.

Doug Grose, senior vice president at AMD, will be the CEO of The Foundry. Grose said in the conference call that ATIC has promised between $3.6 billion and $6 billion over the next five years to fund the expansion of The Foundry's chip-making capacity beyond the facilities initially contributed by AMD. That influx of capital will help the new company proceed with a planned capacity expansion at a fab facility in Dresden, Germany, in 2009.

AMD also announced that The Foundry will begin construction of a new manufacturing plant in Saratoga County, N.Y., creating more than 1,465 jobs there. Grose also noted that once these two projects are complete, they will consider building fab plants in Abu Dhabi.

AMD 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 in a previous interview. "The company has [been] on the record indicating they will pursue a fab-light strategy. ... We believe that the spinout will result in divestiture of their wafer fabrication capabilities, but they will retain their packaging and test operations."

AMD had hinted earlier this year that it was planning to change its asset strategy to lighten what Wall Street analysts have said is a heavy financial burden on the company.

A series of executive shakeups in recent months have had analysts and industry watchers expecting the restructuring. In April, the company announced that Phil Hester, senior vice president and chief technology officer at AMD, resigned to pursue 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.

AMD announced that Ruiz will give up his current role as AMD's executive chairman and board chairman to become chairman of The Foundry.

Copyright © 2008 IDG Communications, Inc.

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