Finally fab-lite: AMD, Abu Dhabi tip “Foundry Company” plans

Oct. 7, 2008 – AMD appears to have finally made the fab-lite move it’s hinted at for a long time, spinning off its fab operations to a jointly owned venture with investors from Abu Dhabi.

“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,” says Doug Freedman, analyst with American Technology Research, in a research note. “AMD has answered the question of how it will stay in the CPU race with leading-edge process technology.”

In a nutshell, the new venture, dubbed “The Foundry Company,” will possess AMD’s manufacturing assets and IP, including Fab 36 and Fab 38 in Dresden, Germany, plus IP and employees — representing a total estimated value of $2.4B. The Advanced Technology Investment Company (ATIC), a technology investment company wholly owned by the Emirate of Abu Dhabi, will pay $700M for a majority stake (55.6% to AMD’s 44.4%) in the venture, contribute $1.4B in new capital, and take on $1.2B in AMD’s debt. Mubadala Development, an investment group owned by the UAE government, which last fall bought an 8.1% stake in AMD for $622M, will boost its stake to 19.3% with another $314M payout. Adding existing assets plus new funding brings the new enterprise’s total worth to roughly $5B, they claim.

In terms of operations, the participants have pledged to complete 300mm conversion at a second Dresden site in 2009, and will start building the highly anticipated Fab 4X at the Luther Forest Technology Campus in upstate NY (Saratoga County), with a projected investment for both products of at least $3.6B and up to $6.0 billion over the next five years — and they hinted that future plans could also include new fab facilities in Abu Dhabi “if commercially justified.” The Foundry Company also will become part of the IBM-led Common Platform alliance for both SOI and bulk silicon technology. The new company’s principal HQ will be in Silicon Valley, with R&D and manufacturing in NY, Austin TX, and Dresden, Germany.

Dirk Meyer, president/CEO of AMD, summed up AMD’s fab-lite desires in a statement, noting that it can now “focus our efforts on design while maintaining access to the leading-edge manufacturing technologies that our business needs without the required capital-intensive investments of semiconductor manufacturing.” Two slides from the presentation (see below) illustrate AMD’s desires, noting the rising cost of investing in semiconductor manufacturing, and a who’s who of chipmakers who have given up on manufacturing chips exclusively in-house.

Transition to new semiconductor technologies are becoming technologically and financially challenging. (Source: In-Stat, World Fab Watch; analyst reports; press clippings; McKinsey team analysis)

From a finance perspective, the deal significantly reduces AMD’s capital expense burden (pegged at $150M-$250M/year on process R&D), and sweeps $1.2B in debt off its balance sheet while taking in roughly $1B in cash infusion, notes Freedman. “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,” Freedman writes. He cautions, though, that near-term won’t necessarily change much, due to a weak PC demand environment.

“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,” wrote Freedman. He added that he thinks AMD could work down its ownership in the fab holding company depending on its ability to come up with future capex.

The growing list of IDMs exiting manufacturing. (Source: Gartner research)


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