October 08, 2008

Analysts: AMD's foundry spin-off may save company

Splitting of company a lifeline for chip giant

By Grant Gross, IDG News Service

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Advanced Micro Devices' decision to spin off its chip-manufacturing business into a separate company just may save the floundering firm, analysts said.

AMD's decision to split into a chip-designing company and a chip-making company should help return the company to profitability sooner, said several analysts who watch the chip-making industry. AMD would remain as the chip-designing company, while the new company, tentatively called The Foundry Co., would focus on chip-making under the plan, unveiled Tuesday.

"I think this is a good move for AMD, especially in the current financial environment," said Dean McCarron, principal analyst for Mercury Research. "It frees AMD of the heavy-debt burden of owning a fab and lets it focus on its primary microprocessor and graphics businesses."

The move should allow AMD to return to profitability much faster than if it kept its foundry business, and it allows AMD to stop worrying about under-use of factories during economic downturns, McCarron added.

But the move is not without risks, added Jack Gold, founder and principal analyst at J.Gold Associates. The Foundry Co., despite a huge investment from the Advanced Technology Investment Company (ATIC), faces a competitive marketplace, Gold said. ATIC is a company set up by the government of Abu Dhabi to invest in tech companies worldwide. It 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. AMD will own the rest of the company.

The Foundry Co. will assume about $1.2 billion of AMD's debt. AMD's revenue from continuing operations for the second quarter of 2008 rose 3 percent from a year earlier, to $1.35 billion. However, the company posted a net loss of $1.19 billion for the quarter.

"AMD gets a sorely needed cash infusion," Gold said. "But, the new company will need to get business in the door from other players, not just AMD, if it is to be successful longer-term. While semi-outsourcing to foundries is a major trend in the industry, it is also highly competitive and not always a good margin business."

Most analysts suggested the deal will put some added pressure on AMD competitor Intel.

"This is good for Intel in that it will offer renewed competition for Intel, which will in turn require it to maintain market leadership in designs and especially in its fabs," Gold said. "Intel has not always been the low-cost producer, and this deal will likely force it to see how it can cost-reduce and 'lean out' its manufacturing, which it has been doing already anyway."

Gold sees little potential for a negative impact to Intel, he said. "In fact, anything that makes AMD more competitive forces Intel to increase its own innovation, which is good for everyone – Intel, system vendors and consumers," he added.

The deal should put pressure on Intel to improve its technology, added Roger Kay, president of Endpoint Technologies Associates.

"The deal makes AMD much more viable over the long run, which directly challenges Intel, and that it will chase Intel into process manufacturing down at least to 22nm (nanometers) both as a chip company and as a foundry," Kay wrote in an email. "The deal also puts other Intel competitors, like nVidia, in a better position by supplying a great alternative foundry."

Intel doesn't yet know enough about the deal to understand how it will work, said Intel spokesman Chuck Mulloy. Mulloy called on AMD to allow the details of a confidential cross-licensing agreement between the two companies to be released to the public so that investors can understand the relationship.

Intel will stick with its approach of both making and designing chips, Mulloy said. An integrated design and manufacturing process can reduce time to market and result in better quality and lower costs, he said.

"We have long believed there are significant advantages to being an integrated device manufacturer," he added.

The deal could have a larger impact on other chip foundries, such as Taiwan Semiconductor Manufacturing Co. (TSMC), which supplies chips for AMD's ATI graphics processor arm, said Kay and Gold.

ATI's business with TSMC will continue for now, Gold said. "But eventually I would expect AMD to consolidate its designs around one fab process and one manufacturer," he added. "With the large investment they are making in CPU designs with the new foundry company, I expect that they will ultimately move their GPU designs over as well, cutting business with TSMC substantially."

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