AMD goes Asset Smart; splits into two

Tuesday 07th October 2008, 02:55:00 PM, written by Arun

In a move that has been worked on for more than a year, AMD has now divested its foundry operations as a separate company. It will be owned 55.6% by ATIC, a subsidiary of the Abu Dhabi government. In total, AMD's liquidity position will improve by $2.4B while massively reducing capital expenditures.

Despite the deal including the creation of new shares and warrants worth $314M, diluting shareholder value, the stock market is reacting very positively to the news: AMD is up nearly 20% as of 11AM ET. And rightfully so, it seems to us: this completely eliminates any risk of AMD running out of cash or eventually having to default on its debts. AMD's mid-term fortunes still depend on the quality of its 45nm CPU line-up and eventually on its upcoming Bulldozer architecture (in 2010?), but this should give them a solid footing to invest in the future.

A number of other data points and implications seem noteworthy:

  • AMD will exclusively manufacture its CPUs at this new entity, putting TSMC and Chartered off the table completely for microprocessors. However, it seems plausible that Abu Dhabi might eventually want to buy Chartered too and integrate it. This would be a big step in the creation of a true IBM Common Platform-based foundry giant, a clear alternative to TSMC for leading-edge foundry work.
  • The new company will "join the IBM joint development alliance for both silicon-on-insulator (SOI) and bulk silicon through the 22nm generation", indicating that AMD might be interested in not solely focusing on SOI-based solutions in the future. Alternatively, bulk silicon might be reserved for other foundry customers.
  • A further $3.6B to $6.0B will be invested in the next 5 years, in order to convert Fab30 into Fab38 in 2009 and start building the New York fab in the middle of 2009. Also, "The Foundry Company envisions expanding its global manufacturing footprint over time, if commercially justified, to also include new fabrication facilities in Abu Dhabi".
  • This might also have interesting implications for next-generation game console contracts. Not only could this new entity compete for contracts involving AMD, but also IBM and even NVIDIA.

IBM's disclosures about its upcoming 32nm High-K process have been received very well by the technical press, and so this is certainly a promising new venture. Right now, it remains overly dependent on AMD's success to be profitable, but in the long-term it should become a very credible alternative to other foundries for leading-edge work. In the current economic conditions, this move should reassure both investors and technology enthusiasts that AMD is there to stay.
AMD's long-term success depends on the performance and cost-efficiency of its upcoming Bulldozer architecture as well as the overall pricing trends in the microprocessor industry, but for now the company is back in a stronger position than they have been in for quite some time.

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