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One company will design chips, the other will manufacture them

It’s no secret that AMD has been in trouble lately.  Despite gaining a commanding position in the graphics industry, the chipmaker giant has been beaten by Intel in the microprocessor market.  With AMD's first 45 nm product, Shanghai, forced to try to enter the market at the same time as Intel's second generation 45 nm Nehalem, and with consist quarterly losses something had to be done.

Today AMD announced a shocking decision that will rock the computer industry -- in order to try to stay competitive, it is splitting in two.  From the ashes of AMD will rise two companies. One will design chips and keep the brand name.  The other, officially named the Foundry Company, will manufacture chips.  The two companies will work closely together, but be independent.

The move also came with good news -- two Abu Dhabi companies have elected to inject at least $5.7B USD into the pair of companies.  Most of this money will go to the Foundry Company, which will use it to build a new factory in Albany, N.Y., and to upgrade its Dresden, Germany factory.

AMD retains a 44.4 percent stake in the new company.  The majority ownership belongs to Advanced Technology Investment Company.  Advanced Technology, a company created by Abu Dhabi's wealthy government, has promised immediate investment of $2.1B USD into the pair.  It says it will follow this with an additional investment that could be anywhere from $3.6B to $6B USD.  Despite the majority stake, Advanced Technology consented to have an equal number of votes as AMD on the Foundry Company's board.

Advanced Technology isn't the only Abu Dhabi company to want a big piece of the AMD pie either.  Mubadala Development Company, which bought an 8 percent stake in AMD last November, will pay $314M USD to buy 58 million shares of AMD stock, to bring its stake in the presplit company to 19.3 percent.  Mubadala and Advanced Technology, despite being competitors in some respects, worked together closely on the new deal.

Khaldoon Al Mubarak, chief executive of Mubadala, states, "We generally believe this deal is a game changer for the industry.  It’s bold, and I think it’s smart."

Waleed al-Mokarrab, chairman of Advanced Technology added about AMD's recent struggles, "Yes, it is a cyclical business, but over time the trajectory is always upwards"

The AMD move is a bit of a shock to the electronics industry, but not an entire surprise.  The company recently announced it was $5.3B USD in debt, with only $1.6B USD of cash on hand.  AMD’s chief executive, Dirk Meyer, said the timing was right to turn for help.  He stated, "This is the biggest announcement in our history.  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."

Before AMD can be officially split up, the deal must meet regulatory and shareholder scrutiny.  The deal is expected to be complete by 2009.  The newly spawned Foundry Company will produce chips for others besides AMD.  It will also compete with the independent Asian foundry firms such as TSMC

The split may strike some as a bit ironic as AMD’s co-founder and longtime chief executive, W. J. Sanders III, known as Jerry, once quipped "real men have fabs", according to company lore.  New CEO Mr. Meyer referenced the joke stating, "We feel like we’re still pretty manly at AMD.  Frankly, the math has changed."

The Foundry Company at launch will control AMD's two chip foundries in Dresden, Germany.  One is in need of an upgrade to make modern chips.  Plans will continue to build the larger state-of-the-art Malta, N.Y. foundry, which will cost $3.2B USD.  The state of New York is offering the new company $1.2B USD in incentives to build the plant, as it will employ 1,400 workers.  The Foundry Company will assume $1.2B USD, or roughly a quarter, of AMD's debt

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By EntreHoras on 10/7/2008 10:02:07 AM , Rating: 3
Is this a direct consequence of the purchase of ATI?
I think so.
Any benefit that purchase may have in the technological plane is outweighed by the deviation of resources to this purchase and now we are seeing the consequences.

By Locutus465 on 10/7/2008 10:07:46 AM , Rating: 5
The ATI purchase was a good idea executed at the wrong time. It really did pay off for AMD in terms of platform capabilities, and it seems AMD software devs really straightend out the ATI software team. But unfortunetly the core CPU business has just been unable to keep up which is both saddening and befuddling. AMD is in no where near as bad a spot (cpu archetecture wise) as Intel was with the P4 line. I still don't think AMD needs a ground up redesign to get competitive, I think they just need to make deeper modifications than they have been willing to make.

Perhaps management is being stupid and is unwilling to spend research dollars on deeper mods to the CPU? Thinking that "well we're still the best on the server side which is the most important side anyway". Unfortunetly for them, Intel just proved you can sit around too long even there, because you'll be left in the dust which is exactly what has happend.

AMD's current troubles doesn't just feel like the troubles a small company faces when competing with a larger one. It feels like bad management.

By omnicronx on 10/7/2008 10:08:09 AM , Rating: 3
AMD's fab troubles have dated back much further than the ATI acquisition, one of the main reasons AMD was unable to take more marketshare from Intel during the A64 days was because they were unable to keep up with production, they just were not able to produce enough chips and Intel took advantage.

By FITCamaro on 10/7/2008 10:52:24 AM , Rating: 2
Yeah it took them forever to get off using 200mm wafers and move to 300mm. Now Intel is moving to what? 400-450mm wafers?

By ianweck on 10/7/2008 12:58:38 PM , Rating: 2
Yeah it took them forever to get off using 200mm wafers and move to 300mm. Now Intel is moving to what? 400-450mm wafers?

Intel would LIKE to transition to 450mm wafers, but their equipment suppliers up to now have balked at investing the money needed to engineer the new equipment. There are no imminent plans to move to 450mm yet though that I have heard.

By Cullinaire on 10/8/2008 7:02:20 AM , Rating: 2
Pulling wafers is going to get a whole lot more interesting if the transition ever does happen!

By William Gaatjes on 10/7/2008 12:31:33 PM , Rating: 2
Was there also not a contract between AMD and Intel that limited the amount of cpu 's AMD could outsource to other foundries at that time during the P4 - Athlon64 timeframe ? If i remember correctly AMD could have produced more if they where allowed to go to other foundries but they where not. How the contracts between Intel and AMD are now i have no idea.

By Bateluer on 10/7/2008 10:10:06 AM , Rating: 5
No sane person wants to see the end of AMD. Hopefully this allows AMD to focus on designing better CPUs and the Foundry Company to make more money by manufacturing chips from AMD and others.

I'm most concerned about Abu Dhabi and UAE owning such a larger percentage.

By Master Kenobi on 10/7/2008 10:32:45 AM , Rating: 1
Given the number of Opteron processors that the US Govt buys I'm also concerned by the increased investment from the middle east. The US Govt tends to use that as a penalty. Nehalem might mark the beginning of Intel in servers where previously Opteron reigned supreme.

By crystal clear on 10/7/2008 10:59:31 AM , Rating: 1
Timing of this deal is bad & will bring about a harsh response from the Govt to shareholders & people in general.

This is a BAILOUT package for AMD on the brink of bankcruptsy.

AMD can expect a very hostile reaction for this in the future.

Intel which licenses technologies to AMD will/may object to this agreement- there are legal issues involved in these licenses.

By Locutus465 on 10/7/2008 11:02:26 AM , Rating: 2
How do you figure the break up will be viewed in these terms? It will make both companies much more streamlined.

By crystal clear on 10/7/2008 11:23:35 AM , Rating: 1
Given the current economic climate in the USA-if you live in the USA you will be certainly aware of the current mood prevailing there.

Sovereign funds when switch their role from a silent partner to a holding controling interest with seats on the Board of directors in a company like AMD,then dont expect smooth sailing.

AMD should have first approached the shareholders to get their acceptance before making such a deal.

By SandmanWN on 10/7/2008 12:15:13 PM , Rating: 3
given the large number of rumors hinting at this very thing for some time now it seems like they've already let their major stock holders in on the deal. maybe you've just missed all the signs.

regardless the market sees this as a positive and rightly so. all you need to do is look at TSMC and see that these fabs can be much more profitable than what amd is currently utilizing them for. not to mention this locks in the NY fab and a major production expansion for amd/foundry.

its really hard to look at this as a negative and the market is in complete agreement what is looking like a very positive stock swing. amd/ati will continue to come up with great ideas. amd/foundry will open the doors to its fabs and will allow for many more business opportunities to thrive.

how you see this as a negative is beyond me. this is the opposite of what has caused the downturn in the US. instead of monetary outflow this money is coming from the outside in which is what we've been striving for.

By crystal clear on 10/8/2008 10:25:57 AM , Rating: 2
Sorry couldnt respond earlier was very busy with some unfinished business before closing off for YOM KIPPUR.

its really hard to look at this as a negative and the market is in complete agreement what is looking like a very positive stock swing.

AMD prices at closing 4.59.....still very low...does not reflect any positive stock swing,

Semiconductor makers are currently awash in production capacity, which tends to drive down chip prices and profits from making them. "It's a highly competitive business out there, and not always with good margins,"

I sign off now with this-

"AMD has found a way to compete with Intel's balance sheet by using Abu Dhabi's balance sheet," Mr. Sanders said

By SandmanWN on 10/8/2008 11:08:48 AM , Rating: 2
No need to apologize. I would rather you didn't respond to begin with because you really don't have anything of substance in your post. Really it was a waste of time for anyone to read.

A positive during a time where stocks have basically plummeted by 20% is a significant upswing.

-A significant injection of capital while maintaining majority share.
-Increase in production capacity.
-Opening doors to new market opportunities through either design or manufacturing.

Im done with blind pessimism in the face a great opportunity. Dissuade if you must but I will listen no more.

By Locutus465 on 10/7/2008 3:50:23 PM , Rating: 2
yeah, I live in the USA as a matter of fact and this is nothing but postitive.... BTW no matter where you live you need to be careful, this securities bust has seaped all over the world.

By crystal clear on 10/8/2008 10:34:20 AM , Rating: 2
Tthis securities bust has seaped all over the world.

How right you are on this....

By crystal clear on 10/8/2008 5:50:30 AM , Rating: 2
Intel which licenses technologies to AMD will/may object to this agreement- there are legal issues involved in these licenses

Now read this to back up my earlier response-sorry could not give it earlier due to time constraints 7 hectic schedules/workloads.

Intel (NSDQ:INTC), too, expressed an interest in the ATIC deal as it pertains to the cross-licensing agreement to produce x86-based microprocessors that exists between Intel and AMD. That agreement is set to expire in 2010, said Chuck Mulloy, legal affairs spokesman for Intel.

"Given the agreement we have with them, we will and we are evaluating what we heard today. It does involve our intellectual property rights and we always defend our intellectual property rights," Mulloy told ChannelWeb on Tuesday.

The Intel spokesman said the confidentiality of the terms of the Intel-AMD cross-licensing agreement prevented him from saying what Intel's potential issues with the ATIC deal might be.

Mulloy said that Intel had been pushing AMD to agree to

make those terms public "for months," but claimed AMD was

not willing to do so

One knowledgeable source contacted by ChannelWeb said any possible Intel dispute over the x86 cross-licensing agreement in terms of the ATIC deal would likely have to do with the actual percentage of AMD's final ownership stake in the Foundry Co.'s manufacturing assets.

By crystal clear on 10/8/2008 8:20:21 AM , Rating: 2
AMD can expect a very hostile reaction for this in the future.

This hostile reaction will come from the shareholders who have seen a series of 7 straight quarterly losses incurred by this AMD management team.

They the shareholder saw/see a mediocore product line up that barely competes with the Intel line up, whose(AMD) profit margins are so low or barely exist.

They saw all the management blunders & failed promises & ofcourse their share prices fall to below USD 5 an all time low & continue to do so..

Now to see themselves sidelined & ignored whilst this deal or the appropriate term would be a bailout package was finalized.

Now to see themselves turned into a minority shareholders or as commonly referred as dillusion of their share holdings, by the infusion of a massive dose of cash by a foreign owned GOVT company namely the UAE, commonly referred to as sovereign funds.

This management team has brought AMD to a level that leaves the shareholders no choice but reluctantly accept this BAILOUT package or SELL OFF their shareholdings to the petro dollars rich UAE for the best possible price they can extract.

There is no guarrantee this deal will ensure AMD abilities to succesfully compete with Intel from a technology or product point of view.

Plenty of cash or funding does not automatically guarrantee sucess....

By William Gaatjes on 10/7/2008 4:58:14 PM , Rating: 2
There are many companies in the US where a lot of stock is owned by the wealthy people of the UAE. There is always an enforcement that these stock owners cannot interfere with the company but i feel that will change sooner or later.

By Rodney McNaggerton on 10/7/2008 5:27:22 PM , Rating: 3
I thought about it myself and I rationalized that the more foreign investors involved in U.S. companies, the better. This is the global economy. I thought about how we give billions of dollars to foreign nations to buy their oil, it's only fitting that the should be allowed to reinvest back into the United States. In the end everyone wins. The more money there are in countries, the more stable they'll be and that's especially important in the middle east.

By PrinceGaz on 10/7/2008 7:50:49 PM , Rating: 4

The demise of AMD would inevitably mean a slow-down in processor developent, and a steady increase in new processor prices by Intel. Some will deny it, but the truth is that Intel wants to make money, and as the sole upper-end x86 CPU manufacturer after the demise of AMD, less would be spent on R&D, and prices of new chips would rise until some non x86 chip was a real competitor (and with Apple now using x86 processors, there is no viable competitor for a long time).

Without a direct competitor, prices can rise almost without limit so long as sufficient people are willing to pay it. What is currently a quite fast £200 CPU could still cost nearly £200 next year, but the equivalent quite fast model then cost closer to £400. And a year later, that first processor may have dropped to £150, and the faster one to £350, but without competition there won't even be a faster desktop chip by then as the cost of developing it when there is no competition makes it a waste of money.

I don't care who owns the competitor to Intel so long as there is one. Rich middle-east states like Saudi Arabia and the UAE are an obvious choice, and China is another so long as they maintain excellent quality-control. The main thing is to ensure there is competition in the market, and in the current climate, it looks like competition will come not from companies in traditional capitalist economies, but from those in what are seen as more state-controlled economies.

"We shipped it on Saturday. Then on Sunday, we rested." -- Steve Jobs on the iPad launch

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