Is This the Beginning of the Turning Around of Chipmaker AMD?
Oct 13th, 2008 | By William Patalon III | Category: Stock Market InvestingThis from William Patalon III in Money Morning:
AMD last week unveiled an “asset lite” strategy that calls for it to sell off its semiconductor-production operations, a move analysts say relieves the smaller chip company of the burden of trying to maintain manufacturing parity with Intel (NYSE:INTC), its much-larger arch rival and neighbor in Silicon Valley.
AMD plans to create an enterprise, initially called The Foundry Co., with Abu Dhabi’s Advanced Technology Investment Co. (ATIC).
The Foundry would absorb AMD’s existing microprocessor plants, or “fabs,” expand a facility in Dresden, Germany, and spend $3.2 billion on a new plant in upstate New York – creating more than 1,400 jobs in the process.
AMD will transfer about 3,000 employees to The Foundry, which will be a U.S.-based company. The deal is subject to review by the Committee on Foreign Investments in the United States. There are no plans to take Foundry public, ATIC and AMD said.
The advanced-technology sector is a “high-value, knowledge-based industrial sector that’s well-aligned with the United Arab Emirate’s broader economic diversification ambitions,” said ATIC Chairman Waleed Al Mokarrab. ATIC is based in Abu Dhabi, and is a government-run capital-investment organization that views the advanced-tech sector as a perfect long-term fit, he said.
With 2007 revenue of $6.01 billion, AMD is much smaller than Intel, which posted revenue of $38.33 billion for the same period. Even so, AMD once had a manufacturing edge over Intel – an edge the smaller company has susequently lost because it’s been unable to make the same investments as Intel in increasingly efficient manufacturing processes.
In July, however, AMD reported its seventh consecutive quarter of losses, and replaced Hector De Ruiz as chief executive.
Plans call for ATIC to pay AMD $700 million in cash for a 55.6% stake in the new company. ATIC will add another $1.4 billion to the new The Foundry Co. operations immediately and promises to invest between $3.6 billion and $6.0 billion on new facilities over the next five years.
AMD also will get to transfer $1.2 billion of its debt to the new company. AMD had $5.3 billion in debt as of mid-year, and wrote down its $5.4 billion investment in graphics chipmaker ATI in 2006, recording $2.4 billion in impairment charges.
As part of this deal, AMD also will receive an investment from Abu Dhabi’s state-run Mubadala Development Co., which is boosting a stake in AMD that it first acquired last year.
Mubadala paid more than $600 million for an 8.1% stake in AMD last November, when the feisty chipmaker’s stock was trading at $12.70 a share. It’s now ratcheted its stake up to 19.3%, and it only took another $314 million to make that happen. That’s because AMD’s shares are down 67% since then: They closed Monday at just $4.23 each, at $4.05 Wednesday and $3.81 on Friday).
In return for its outlay, Mubadala will get 58 million newly issued AMD shares and warrants for 30 million more. It also gets the right to nominate someone for AMD’s board of directors.
Between that deal and $700 million in cash AMD is getting from the Abu Dhabi-backed Advanced Technology Investment Co., AMD’s assets will balloon by more than $1 billion, analysts say.
“This isn’t sleight of hand – this is a very hefty investment that helps clean up AMD’s balance sheet,” JoAnne Feeney, an analyst with FTN Midwest Securities Corp., told The Associated Press. “This is the beginning of turning AMD around.”
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William (Bill) Patalon III is the Managing Editor and Senior Research Analyst for Money Morning, and is also the Managing Editor for The Money Map Report. Patalon's work has appeared in Kiplinger's personal finance magazine, USA Today, and The South China Morning Post, among other publications.
