(Adds analysts’ comments in paragraphs 10-12)
By David Lawsky
SAN FRANCISCO, Oct 7 (Reuters) - U.S. chip maker Advanced Micro Devices Inc AMD.N plans to spin off its manufacturing plants into a $5.7 billion joint venture with Abu Dhabi to get a cash injection and shrink debt to better compete against larger rival Intel Corp (INTC.O).
AMD shares jumped 18 percent to $5 on Tuesday after Wall Street waited for months for the struggling chip maker to formulate its so-called “smart asset” strategy to focus more on chip design and less on costly factories.
Advanced Technology Investment Company (ATIC), an Abu Dhabi state-owned venture capital firm, said it will invest $2.1 billion for a 55.6 percent stake in the venture, of which $700 million will go directly to AMD, which will hold the remaining stake. The two will divide the venture’s board seats equally.
ATIC also committed to investing another $3.6 billion to $6.0 billion over 5 years to fund the venture’s expansion. The 3,000-person new company will hold AMD’s two plants in Dresden, Germany and make all of its central processing units, as well as chips for other companies.
Another Abu Dhabi government company, Mubadala Development Co, will spend $314 million to increase its stake in AMD to 19.3 percent from 8.1 percent and gain a seat on AMD’s board.
Brian Mata, an analyst at IC Insights in Arizona, said AMD desperately needed the boost. The company has posted seven consecutive quarters of losses and is forecast by Wall Street to report another quarterly loss next week.
“The key thing is the financial backing from Abu Dhabi because AMD was essentially out of money,” said Mata.
He said AMD can focus on design and has the money to try to catch up with Intel, but the new venture has a challenge competing with existing contract chip manufacturers.
“The foundry business is already pretty entrenched,” he said, citing Taiwan Semiconductor Manufacturing Co Ltd (2330.TW), United Microelectronics Corp (2303.TW), Singapore’s Chartered Semiconductor Manufacturing Ltd CSMF.SI and China’s Semiconductor Manufacturing International Corp (0981.HK).
In the short term, Rick Hsu, a semiconductor analyst at Nomura in Taipei, said the new venture won’t have major impact on TSMC (TSM.N) and UMC (UMC.N), which have larger economies of scale, advanced technology and a wide customer base.
“I don’t see any major impact until after 2010,” Hsu said. “The new company will only have a very small market share in the beginning, maybe 5 percent in the first year.”
However, Hsu said the new entrant could become a competitor in the longer term if it moves up the tech ladder and boosts its product portfolios.
AMD has lost market share to Intel and in the last few years was forced to weigh the price of its pride in owning the semiconductor fabricating plants, or “fabs,” which most other chip makers gave up long ago.
It has also been hit by problems with its high-end personal computer and server Barcelona chip, and had bumps along the road after acquiring graphics chip maker ATI.
Despite the jump in AMD’s share price on Tuesday, the stock remains far below its 12-month high of $14.73.
“Today is a landmark day for AMD, creating a financially stronger company with a tightened focus,” Dirk Meyer, president and CEO, said in the statement.
The new venture, temporarily called Foundry Company, will assume all $1.2 billion of AMD’s manufacturing operations debt so the remaining company can compete hard against Intel, which sells about 80 percent of the central processing units at the heart of the world’s 1 billion PCs. AMD makes the rest.
“A duopoly is a very helpful market structure for companies and a very profitable one. AMD needs to improve its execution to enjoy the potential benefits,” said JoAnne Feeney, an analyst with FTN Midwest in Boston, who has “buy” ratings on AMD and Intel. “Separating the companies into design and manufacturing will improve their execution.”
The venture plans to break ground next year for a factory in upstate New York, employing 1,400 people, if New York state will transfer financial incentives to the new company.
The chief executive will be Doug Grose, senior vice president of technology at AMD and its new chairman will be Hector Ruiz, now chairman of AMD.
The venture will upgrade one of the two plants in Dresden and build the plant in New York to the latest technology standards, AMD said. It said the venture, which will be on AMD’s balance sheet, may ultimately build a fab in Abu Dhabi.
ATIC Chairman Waleed Al Mokarrab said on a conference call that this was his company’s first major investment and “though owned by the Abu Dhabi government, ATIC will be directed by commercial principals that will generate commercial returns.”
Mubadala, which holds stakes in sectors ranging from energy to aerospace, purchased an 8.1 percent share of AMD in 2007 for $622 million. It will boost that to 19.3 percent by buying 58 million newly issued shares and warrants for 30 million more.
The deal is to close at the end of 2008 or early in 2009, if approved by stockholders. It will also be reviewed by the U.S. government inter-agency Committee on Foreign Investments in the United States (CFIUS).
The deal will be welcomed by IBM (IBM.N), which has worked closely with AMD and other chip makers to improve chips. The company will be part of the IBM technology alliance, making it easier to build chips for members. (Additional reporting by Tiffany Wu and Baker Li in TAIPEI; editing by Maureen Bavdek and Ian Geoghegan)