AMD gets $6 billion while its plants move into a Foundry Company focused on chip fabrication

Oct 7, 2008 07:12 GMT  ·  By

Advanced Micro Devices is expected to announce on Tuesday its plans for dividing into two separate companies, one that will design microprocessors and one focused on manufacturing chips. The Sunnyvale company has been rumored in the recent few months to be on the verge of spinning off its fabs in an effort to overcome financial issues and also remain competitive on the market; it was said to make the announcement about three weeks ago.

The chip maker said that the two companies would receive an investment of around $6 billion from two Abu Dhabi firms. The investment will mainly go to a new chip factory planned to be built near Albany, N.Y., as well as for the upgrading of an existing manufacturing facility in Dresden, Germany.

After the split, AMD, a graphics, computer and server processor designer ad manufacturer, will own around 44.4 percent of the new firm, which will be named the Foundry Company for the time being. The rest of the entity will be owned by Advanced Technology Investment Company, which announced that $2.1 billion would immediately be dispatched, while also contributing with $3.6 billion to $6 billion more for the upgrading and building of chip manufacturing facilities. According to AMD, the vote control will be equally shared between the two companies.

The second Abu Dhabi firm involved is Mubadala Development Company, which already acquired 8 percent of AMD's shares in November. Mubadala Development will purchase 58 million newly issued shares for $314 million, thus owning 19.3 percent of AMD before the split. On Monday, AMD's stock closed at $4.23 per share, dropping 30 cents.

“We generally believe this deal is a game changer for the industry,” said Khaldoon Al Mubarak, chief executive of Mubadala. “It’s bold, and I think it’s smart.” The Sunnyvale chip maker sees this move as a the big step that will ensure the company's future. “This is the biggest announcement in our history,” said AMD’s chief executive, Dirk Meyer. “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.”

AMD has been on the descending highway since it acquired ATI two years ago, and things are getting from bad to worse. The acquisition made a great hole in AMD's pocket, as it grew larger. Since the company had to invest billions in designing new chips and upgrading its plants to build the chips, disaster stroke. In June, the chip maker announced that it had $1.6 billion in cash, while its debts rose to $5.3 billion.

The splitting will conclude in early 2009, says AMD. The transaction has to be approved first by shareholders, regulators and officials in New York and Germany. The Foundry will build chips both for AMD and other companies, which means that it will face competition too, mainly from firms located in Asia. $700 million of the $2.1 billion from Advanced Technology will account for AMD's stake in the Foundry Company, which is said to assume $1.2 billion of the chip maker's debt.

After the spin, the only PC chip maker to design and built its own chips remains Intel. Having your own fabs is seen as an advantage by some, as there is always a way to control the manufacturing process and align the new chips with the latest technology advances. On the other hand, the maintenance costs for plants are enormous, this being one reason for AMD's decision.

AMD will still benefit from the manufacturing facilities, since a part of the new firm will be dedicated to building its chips, and the company will keep a close dialog with its engineers. One of the plants the chip maker owns in Dresden is already state-of-the-art, while the other is being upgraded and conversed in order to build chips for other designers as well.

After the transaction is settled, AMD will start building a new manufacturing facility in Malta, N.Y., north of Albany. The plant will have around 1,400 workers. It will be owned by the new manufacturing company and will receive $1.2 billion in incentives from the State of New York. IBM also has fabs in the state and announced it had extended a technology pact with AMD to 2015.