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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 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....

“Then they pop up and say ‘Hello, surprise! Give us your money or we will shut you down!' Screw them. Seriously, screw them. You can quote me on that.” -- Newegg Chief Legal Officer Lee Cheng referencing patent trolls

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