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AMD spins off manufacturing ops, creates foundry with Abu Dhabi investment firm
The struggling chipmaker and Abu Dhabi-based Advanced Technology Investment Co are creating a new semiconductor manufacturing company, while Mubadala Development Co is increasing its investment in AMD.
By Ann Steffora Mutschler, Senior Editor -- Electronic News, 10/7/2008
Marking a major change in its competitive efforts to keep up with rival Intel Corp, this morning Advanced Micro Devices (AMD) announced it is spinning off its manufacturing operations, finally filling in details of its “Asset Smart” strategy that the company has alluded to for more than a year.
During a conference call this morning, AMD President and CEO Dirk Meyer (pictured left) detailed the company’s strategy with a plan that he said “will help us transform AMD and the semiconductor industry through the creation of a new company referred to as The Foundry Company.”
Advanced Technology Investment Company (ATIC) of Abu Dhabi to create a brand new and leading edge semiconductor manufacturing company – one that optimizes a new global enterprise with talent and resources from around the world, designed to serve customers everywhere.”
This follows the investment last November from the Abu Dhabi government’s wholly-owned investment and development subsidiary Mubadala Development Co of $622 million in the microprocessor maker.
“Second, we are expanding our partnership with the Mubadala Development Company, which will increase its ownership in AMD as a statement of its confidence in our strategy and capability. The combination of these two events will result in a stronger and more tightly focused AMD, unlocking the value of our manufacturing assets, with a solid commitment to expand those assets to meet growing demand for global leading edge foundry services in the semiconductor industry,” Meyer continued.
Mubadala, currently an 8.1% AMD shareholder, will increase its stake to 19.3% of outstanding AMD shares on a fully diluted basis, accomplished through the purchase for $314 million of 58 million newly issued AMD shares and warrants for 30 million additional shares. With this investment, Mubadala gains the right to appoint a designee to AMD’s board of directors.
Commenting on the deal, analyst Doug Freedman of American Technology Research, who currently has a “Buy” on AMD’s stock said in a report today, “It looks like Hector Ruiz has pulled it off. AMD appears to have answered the question on Wall Street that has lingered for more than a year: What is Asset Smart (or Fab lite, or what ever name they want to put to it)? With sparse details and information from our sources we will try to piece the ownership and valuation puzzle together as details are confirmed and investors get long-awaited answers.”
The temporarily named Foundry Company has plans to build a new manufacturing facility in Upstate New York, expected to create more than 1,400 jobs, and will also expand AMD’s existing manufacturing facility in Dresden, Germany.
AMD is contributing its manufacturing facilities to The Foundry Company, including two fabs in Dresden, Germany, along with related assets and intellectual property rights.
For its part, ATIC will invest $2.1 billion to purchase its stake in The Foundry Company, of which it will invest $1.4 billion directly in the new entity and the remainder will be paid to AMD to purchase additional shares in The Foundry Company, the companies said in a statement.
The Foundry Company will also assume approximately $1.2 billion of AMD’s existing debt with ATIC committing additional equity funding to The Foundry Company of a minimum of $3.6 billion and up to $6 billion over the next 5 years to fund the expansion of The Foundry Company’s chip-making capacity beyond the manufacturing facilities initially contributed by AMD.
The funds will be used by The Foundry Company to proceed with capacity expansion at its fabs in Dresden, Germany, including an upgrade of one of its fabs to a state-of-the-art facility, as well as begin construction on a new facility in Saratoga County, New York, subject to the transfer of previously-approved New York State incentives.
The New York facility is expected to create more than 1,400 direct jobs, and, through its operation, to generate an additional 5,000 jobs in the region and once operational, will be, the companies claim, the only independently-managed, leading-edge semiconductor manufacturing foundry in the US.
Further, The Foundry Company will join the IBM joint development alliance for both silicon-on-insulator (SOI) and bulk silicon through the 22-nm generation.
"We welcome The Foundry Company into the IBM alliance and are pleased to see the company investing in New York. The Foundry Company’s membership in the alliance brings new intellectual capital to our collaborative effort and continues to build on the momentum and leadership that the alliance has established in semiconductor technologies,” said Dr. John E. Kelly III, senior VP and director of research at IBM, in a statement.
In terms of the boards of directors of The Foundry Company, seats will be equally divided between representatives of AMD and ATIC, as AMD will own 44.4% and ATIC will own 55.6% of The Foundry Company’s fully-converted common stock upon its formation.
Doug Grose will leave his current role as AMD’s senior VP of manufacturing operations to become CEO of The Foundry Company, while Hector Ruiz, AMD executive chairman and chairman of the board will become chairman of The Foundry Company.
“The creation of The Foundry Company represents a critical milestone in the evolution of the semiconductor industry. Companies are eager for choice in the supply of leading-edge manufacturing capacity, and our new venture is answering that call. By combining operational excellence, leading-edge technology developed in collaboration with IBM, and an aggressive capacity roadmap, The Foundry Company aspires to drive the next round of innovation in this industry,” Grose said.
As a result of deal, AMD believes its financial position will be strengthened along with its focus on the design and development of innovative computing and graphics solutions. This deal improves AMD’s liquidity through The Foundry Company’s assumption of approximately $1.2 billion in debt, ATIC’s $700 million payment to AMD for ownership interests in The Foundry Company and Mubadala’s $314 million paid to AMD for 58 million newly issued AMD shares and warrants for 30 million additional shares.
Khaldoon Al Mubarak, CEO and managing director of Mubadala commented in a statement, “We are as enthusiastic about AMD’s potential today as we were when we made our initial investment last year. This increased investment is a strong vote of confidence in AMD’s Asset Smart business strategy, evolved leadership team, and best-in-class technology.”
ATIC Chairman Waleed Al Mokarrab said, “More than a year in the making, today’s announcement significantly reshapes the global semiconductor industry – it is an investment where all parties see significant opportunity. Independent and well-capitalized, The Foundry Company begins day one with an established leading-edge customer, an advanced technology roadmap, an R&D partnership with IBM, and a clear plan to scale capacity, providing it the foundation to become a clear leader in global semiconductor manufacturing.”
When the transaction closes, expected for the beginning of next year, The Foundry Company will start operating with approximately 3,000 employees who will transition into the new company from AMD facilities in Silicon Valley, New York, Dresden, and Austin.
When the deal closes, The Foundry Company will have a total enterprise value of $5 billion, consisting of AMD's contribution of manufacturing assets and intellectual property (including its fabrication facilities in Dresden), intellectual capital and employees valued together at $2.4 billion; ATIC's contribution of $1.4 billion in new capital; and $1.2 billion of debt assumed by The Foundry Company from AMD. Also, The Foundry Company will be consolidated with AMD for financial reporting purposes; have a board of directors whose membership is equally divided between representatives of AMD and ATIC; have only AMD and ATIC as stockholders, each of which at the closing will have equal voting rights; be owned 44.4% by AMD and 55.6% by ATIC on a fully converted to common basis.
Further, ATIC’s economic ownership will increase over time based on the differences in securities held by AMD and ATIC, and depending on whether AMD elects to invest proportionately with ATIC in future capital infusions to support The Foundry Company’s growth.
The company will have its principal headquarters in Silicon Valley, and R&D and manufacturing leadership teams and ecosystems in New York, Dresden, and Austin.
The Foundry Company will have an exclusive supply agreement with limited exceptions to manufacture AMD processors and to manufacture, where competitive, certain percentages of other AMD semiconductor products, the companies said.
Further, construction of the Fab 4X manufacturing facility in New York will begin in the middle of next year, directly employing more than 1,400 workers in Upstate New York when the facility is in full operation.
In terms of capacity, the company expects to increase capacity through completing the 300-mm conversion of a second in Dresden also next year. After the upgrade and expansion in Dresden and the build-out of the New York facility, The Foundry Company said it plans to expand its global manufacturing footprint over time, if commercially justified, to also include new fabrication facilities in Abu Dhabi.
The permanent corporate name and identity for The Foundry Company will be announced once the deal is completed.
American Technology Research's Freedman also believes this deal, without a doubt, has answered the question about how long AMD will stay in the CPU race with leading edge process technology. “The cash infusion, debt off-load, reduction in R&D expenses, operating cash flow and long term capital commitment must lay to rest all investor concern regarding access and control of future process technology,” he said.
Also, he pointed out, capital expenses and R&D for AMD for the design side of the business will drop significantly as a result of the deal and he estimates that AMD spends between $150 and $200 million per year on process technology R&D.
With AMD retaining 44.1% of the fab holding company, while the Abu Dhabi investors will have 55.9%, the $1.2 billion debt will move off AMD's balance sheet, though it will remain responsible for some portion going forward. “We believe AMD will retain or work down its ownership in the fab holding company dependent on its ability to fund future capex,” Freedman said.
Also as part of the deal, Freedman believes there will be between 10 and 11% dilution to AMD shareholders as investors are granted new shares and warrants, and in return, AMD will get a much needed cash infusion of $700 million and $314 million from Abu Dhabi with some or all of the cash going toward debt reduction.
Freedman reiterated his “Buy” rating as the debt load is lightened, cash is infused and the ongoing technology roadmap is funded, all while R&D expenses are reduced and the break-even point is materially lowered.
