(Source: Business Week)
Chipmaker Advanced Micro Devices took the wraps off a long-awaited reorganization on Oct. 8, announcing a plan to spin off its manufacturing operations into a separate company that it will jointly own with investors from Abu Dhabi.
The new company, Foundry Co., will be comprised of AMD's (AMD) factories in Dresden, Germany, and one yet to be built in Saratoga, N.Y. Essentially a for-hire factory, Foundry will make AMD chips under contract but also have the freedom to win business from other chip companies. Foundry joins the ranks of such chip foundry companies as Taiwan Semiconductor Manufacturing (TSM); United Microelectronics (UMC), also of Taiwan; Chartered Semiconductor (CHRT) in Singapore; and IBM Microelectronics, a unit of computing giant IBM (IBM).
The spin-off helps AMD reduce the high chip-manufacturing costs that, along with a poorly executed acquisition of ATI Technologies, have fueled losses and led to the July removal of CEO Hector Ruiz, who was replaced by Dirk Meyer. Shorn of its factories, AMD can refocus its efforts on designing PC microprocessors and graphics chips for customers such as Dell (DELL) and Hewlett-Packard (HPQ). Ruiz stayed on as chairman, with oversight of the reorganization [BusinessWeek, 08/11/08], code-named Asset Smart, that has been in the works for years. "This is the best of all possible outcomes for AMD," says Ashok Kumar, an analyst at Collin Stewart in San Francisco. "AMD will still have a lot of control over its manufacturing. There's no reason now they can't return to sustainable profitability."
Minority Owner, Equal on the Board AMD will spin off its fabricating factories, or fabs, as they're commonly known in the industry, to the new company. Most of its operating capital will come from Advanced Technology Investment company, an investment firm wholly owned by the government of Abu Dhabi, an oil-rich Arab state in the Persian Gulf. ATIC will invest $2.1 billion in Foundry -- $700 million of which will be paid directly to AMD -- for a 55.6% equity stake. AMD will be a minority owner, owning 44.4%. Both AMD and ATIC will be equally represented on the board of directors. Foundry will assume about $1.2 billion, or about 24%, of AMD's long-term debt. Doug Grose, AMD's senior vice-president in charge of manufacturing and a former IBM exec, will be Foundry's CEO. ATIC has pledged to provide additional equity funding of $3.6 billion to $6 billion over the next five years.
Abu Dhabi's investment arm, Mubadala Development, paid $622 million for an 8% equity stake in AMD in November, when the company was trading at $12.70. Since then, AMD's stock has lost 64% of its value, even after an Oct. 7 rally that left the stock 8.5% higher, at $4.59.
