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AMD to Spin off Chip Fabs to Raise Funds

Advanced Micro Devices plans to split into two companies, one to design chips and one to make them, while two investment funds owned by the government of Abu Dhabi will contribute new capital, it said Tuesday. AMD hopes the move will give it the resources it needs to compete effectively with Intel, which dominates the microprocessor industry.

The Advanced Technology Investment Company (ATIC), created by the government of Abu Dhabi, will buy a substantial stake in the chip-making operation, tentatively called The Foundry Co. and contribute additional funds over the next five years to build a new chip fabrication plant, or fab, in New York state and to upgrade one of two AMD fabs near Dresden in Germany. The Foundry Co. will remain headquartered in the U.S., and will also make chips for other companies.

Investment Promised

ATIC will invest US$1.4 billion directly in The Foundry Co. and pay another $700 million to AMD, giving it 55.6 percent of the new company and half the seats on the board. AMD will contribute intellectual property rights and its Dresden fabs to the company. AMD will own the remaining 44.4 percent and control the other half of the seats. The Foundry Co. will also assume around $1.2 billion of AMD's debt.

Over the next five years, ATIC will invest between $3.6 billion and $6 billion to fund redevelopment of one of the Dresden fabs and build a new one in New York.

At the same time, Mubadala Development Co. will pay $314 million to increase its stake in AMD to 19.3 percent. It bought an 8.1 percent stake in the company for $622 million last November.

"It's a plan that, with strong partners, will help us transform AMD and transform the semiconductor industry," AMD President CEO Dirk Meyer said in a conference call.

The Foundry Co. will be led by Doug Grose, currently AMD's senior vice president of manufacturing operations, who will resign that post to become CEO of the new company. Hector Ruiz will resign as chairman of AMD to become chairman of the chip business. Ruiz recently quit as CEO of AMD, handing over the reins to Dirk Meyer who took over as president and CEO in July.

Seeking Shareholder OK

The companies expect to close the deal at the beginning of next year, if they get approval from AMD shareholders and regulators including the Committee on Foreign Investment in the United States.

One potential obstacle is related to construction of the new fab in New York. The state government has not yet agreed to transfer to The Foundry Co. payments previously voted to AMD, but "we're confident that the state will transfer the investment," said Ruiz.

AMD has been talking for some months about adopting an "asset light" or "asset smart" strategy in which it would divest some its debt-heavy manufacturing assets to focus on chip design.

Analysts welcomed AMD's announcement.

"It will be able to concentrate its resources on product design, allowing it to focus on delivering products that are consistently competitive with those of Intel," said John Spooner, senior analyst with Technology Business Research.

The deal will allow AMD to participate in an entirely new business -- a foundry that takes in work from other fabless semiconductor companies, said Roger L. Kay, president of Endpoint Technologies Associates

"Good on AMD for putting together the right partnership with various financing groups in Abu Dhabi," he said.

While Intel and AMD have clung to their manufacturing facilities, "fabless" semiconductor companies such as ARM, a designer of microprocessors for mobile and embedded devices, and contract manufacturing companies such as Taiwan Semiconductor Manufacturing Co. (TSMC) are an established feature of the chip manufacturing industry.

AMD will announce its third-quarter earnings on Oct. 16, after the stock market closes. It has made a loss in the last seven quarters.

Spooner sees an end to that losing streak: "A more competitive AMD product line will bring with it higher revenue and profitability for the chipmaker, reversing its recent string of unprofitable quarters."

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