Chipmaker Advanced Micro Devices took the wraps off a long-awaited about-face on Oct. 8, announcement a plan to circuit off its accomplishment operations into a abstracted aggregation that it will accordingly own with investors from Abu Dhabi.
The new company, Branch Co., will be comprised of AMD's (AMD) factories in Dresden, Germany, and one yet to be congenital in Saratoga, N.Y. Essentially a for-hire factory, Branch will accomplish AMD chips beneath arrangement but aswell accept the abandon to win business from added dent companies. Branch joins the ranks of such dent branch companies as Taiwan Semiconductor Accomplishment (TSM); United Microelectronics (UMC), aswell of Taiwan; Chartered Semiconductor (CHRT) in Singapore; and IBM Microelectronics, a a*semblage of accretion behemothic IBM (IBM).

The aftereffect helps AMD abate the top chip-manufacturing costs that, forth with a ailing accomplished accretion of ATI Technologies, accept fueled losses and led to the July abatement of CEO Hector Ruiz, who was replaced by Dirk Meyer. Shorn of its factories, AMD can refocus its efforts on designing PC microprocessors and cartoon chips for barter such as Dell (DELL) and Hewlett-Packard (HPQ). Ruiz backward on as chairman, with blank of the about-face (BusinessWeek, 08/11/08), code-named a*set Smart, that has been in the works for years. "This is the best of all accessible outcomes for AMD," says Ashok Kumar, an analyst at Collin Stewart in San Francisco. "AMD will still accept a lot of ascendancy over its manufacturing. There's no acumen now they can't acknowledgment to acceptable profitability."

Minority Owner, Equal on the Board

AMD will circuit off its architecture factories, or fabs, as they're frequently accepted in the industry, to the new company. Most of its operating basic will appear from Advanced Technology Investment company, an investment close wholly endemic by the government of Abu Dhabi, an oil-rich Arab accompaniment in the Persian Gulf. ATIC will advance $2.1 billion in Foundry—$700 actor of which will be paid anon to AMD—for a 55.6% disinterestedness stake. AMD will be a boyhood owner, owning 44.4%. Both AMD and ATIC will be appropriately represented on the lath of directors. Branch will accept about $1.2 billion, or about 24%, of AMD's abiding debt. Doug Grose, AMD's chief vice-president in allegation of accomplishment and a above IBM exec, will be Foundry's CEO. ATIC has apprenticed to accommodate added disinterestedness allotment of $3.6 billion to $6 billion over the next 5 years.

Abu Dhabi's investment arm, Mubadala Development, paid $622 actor for an 8% disinterestedness pale in AMD in November, if the aggregation was trading at $12.70. Since then, AMD's banal has absent 64% of its value, even afterwards an Oct. 7 a*semblage that larboard the banal 8.5% higher, at $4.59. With this new transaction, Mubadala has additional its pale in AMD to 19.
4%, paying $314 actor for 58 actor shares, added warrants for an added 30 actor shares.

Pricey Upkeep

AMD has racked up losses of $1.6 billion on sales of $2.8 billion this year, and abundant of those losses are a*sociated with the amount of owning and operating big-ticket dent fabs that amount about $3 billion to $5 billion apiece to build, and about $1 billion to advancement every two years or so. There are aswell costs accompanying to captivation and distributing stockpiles of unsold chips (BusinessWeek, 05/30/07) if appeal doesn't bout expectations.

AMD's research-and-development expenses—$1.85 billion, or 30% of sales, in budgetary 2007—will bead significantly, says Doug Freedman, an analyst at American Technology Analysis in San Francisco. "We appraisal that AMD spends $150 actor to $200 actor per year on process-technology R&D," he wrote in an Oct. 7 analysis note. Freedman ante the banal a "buy" with a amount ambition of $10.

Although AMD stands to accretion from lower operating expenses, it will be appointment abundant of its bookish property—and some that it doesn't own—to a third party. That may not sit able-bodied with Intel (INTC), with which AMD has had a alternation of cross-licensing agreements traveling aback to the 1970s. The latest such acceding expires in 2010. Intel agent Chuck Mulloy says the aggregation "has some concerns" about the accord but beneath to be specific. "The acceding gives them a amount of rights with account to our technology and gives us some rights with account to their technology," he says. "We're in the action of evaluating this, and we accept a lot of questions. As is our accustomed practice, we will agilely avert our bookish property." The companies are already litigating an antitrust clothing filed by AMD adjoin Intel in 2005.

Drop in All-around Demand

While AMD has arrange with Singapore's Chartered Semiconductor to aces up added chipmaking plan if appeal outstrips its capacity, baggy appeal costs big money in underused equipment. Foundry will be chargeless to seek business from added dent companies that don't own their own fabs. "The acceptable account for AMD is that they won't accept to anguish about arresting the amount of all that accommodation with just their own a*sembly requirements," says Nathan Brookwood, arch of analysis close Insight64.

AMD's headcount will bead by about 3,000 as its accomplishment advisers are confused to the new company. But these aforementioned advisers will still be adherent to authoritative AMD's chips. New advisers will be added in time as Foundry attracts new customers, Sonderman says.

The breakdown would a*sume abundant bigger account if common appeal for PCs and added articles that crave chips looked stronger. "We afresh met with several above PC makers in Taiwan who appropriate that…fourth-quarter orders accept been cut in contempo weeks due to all-around macro appeal deterioration," Craig Berger, an analyst at FBR Research, wrote in a contempo note.