Fabless future: Struggling AMD spins off factories

SAN FRANCISCO -- For years, Advanced Micro Devices' scrappy image was best summed up by an insult that founder Jerry Sanders lobbed against rivals: "Real men have fabs."

Sanders meant that while many chip companies design semiconductors and outsource the manufacturing, AMD enjoyed the relatively rare advantage of owning its factories, known as fabrication plants, or fabs.

Times have changed, though, and now so has AMD's commitment to hanging onto those facilities, which have become a cash drain on a struggling company. The world's No. 2 maker of microprocessors said Tuesday it is spinning off its manufacturing operations in a deal with an investment arm of the Persian Gulf state of Abu Dhabi.

Advanced Technology Investment, AMD's partner in the joint venture, has promised to contribute up to $8.1 billion over the next five years to upgrade AMD's factories in Germany and help build another one in New York. Those factories will be absorbed into the new company, called Foundry.

The unusual deal, which will likely face U.S. government scrutiny since semiconductors are considered sensitive technologies, allows AMD to unload $1.2 billion of its $5.3 billion in debt onto the new company and focus on chip design. Foundry Co. will produce chips for AMD and other customers.

The move should help shore up AMD's finances, but it also highlights the company's recognition that it can't compete dollar-for-dollar on manufacturing against Silicon Valley rival Intel, the world's biggest semiconductor company.

Building ever-more sophisticated computer chips requires billions of dollars in factory upgrades every few years. With a market value more than 30 times that of AMD, Intel has vastly more resources to pour into developing new manufacturing technologies.

That dynamic pushed AMD in 2002 into a partnership with IBM to jointly develop new chip-making technologies, a relationship that will continue under AMD's new structure.

"This isn't sleight of hand — this is a very hefty investment that helps clean up AMD's balance sheet," said JoAnne Feeney, senior research analyst with FTN Midwest Securities. "This is the beginning of turning AMD around."

AMD shares were up 49 cents, 12%, to $4.72 in afternoon trading Tuesday.

AMD also announced that the Mubadala Development, an investment company whose sole shareholder is the government of Abu Dhabi, will pay $314 million to increase its stake in AMD to 19.3% from 8.1%.

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 from Advanced Technology Investment, AMD's assets will balloon by more than $1 billion.

The deals illustrate a broader trend of strapped American companies reaching out to foreign investors, particularly in oil-rich countries, for cash infusions at a time when the financial crisis in the U.S. has made big loans from traditional lenders hard to come by.

Mubadala in particular has emerged as one of the world's most active government-run investment vehicles in recent years. It's based in Abu Dhabi, capital of the United Arab Emirates and the largest and richest of the Persian Gulf country's seven semiautonomous sheikdoms.

In July, for example, General Electric agreed to a joint venture in which Mubadala promised to pump $4 billion into GE's weakened commercial finance business.

Mubadala spokesman Richard Mintz declined to comment on the pending federal review of the AMD deals. But he predicted that U.S. officials would have a better understanding of the United Arab Emirates than they did when a political firestorm broke out over a proposed deal with a Dubai-based port operator in 2006.

Dirk Meyer, who took over as AMD's CEO after Hector Ruiz stepped down in July amid intense shareholder pressure, called the announcement a "hugely significant" deal for AMD.

"It really changes the financial model around how we pay for leading-edge semiconductor technology," Meyer said in an interview.

Meyer said he'd thought a lot about Sanders' "real men" remark and concluded that: "The times have changed. The economics have changed. And now smart men have foundries, and that's what we have through our ownership of Foundry," he said.

Foundries are factories that make chips for other companies, freeing them to focus on design and development only. Such "fabless" semiconductor companies include graphics chipmaker Nvidia.

While the spinoff is good for AMD's finances, it could set up a showdown with Intel over a cross-licensing agreement the two companies have covering the so-called x86 architecture, which is the heart of PC chips and many server chips. That agreement contains confidential parts that Intel could claim AMD violated if the new investors were given access to them.

Intel spokesman Chuck Mulloy said the company is evaluating the deal.

"Given the confidential provision, even AMD's new investors could not know the confidential terms of the contract," he said. "We're curious about whether the new investors made this commitment without even knowing the terms of AMD's license with Intel."

An AMD spokesman did not have a comment about the licensing deal.

John Barton, an analyst with Cowen and Co., said he was skeptical of the new manufacturing strategy, partly because the spinoff company's management will be coming from AMD.

Foundry's board will be equally comprised of executives from AMD, which will own 44.4% of the company, and Advanced Technology Investment, which will own 55.6%.

An AMD senior vice president, Doug Grose, is to become chief executive of Foundry, and Ruiz, who had been AMD chairman, will step down to take on that post at Foundry.

The transaction is expected to close at the beginning of 2009, pending regulatory approvals. Foundry Co. will start operations with about 3,000 employees from AMD facilities in Silicon Valley, New York, Dresden, Germany, and Austin, Texas. If "commercially justified," AMD said, Foundry might add new factories in Abu Dhabi.

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AP Technology Writer Barbara Ortutay in New York and AP Business Writer Adam Schreck in Dubai contributed to this report.