Fab spin-off saves AMD and Hector Ruiz
Business and Law Features

Fab spin-off saves AMD and Hector Ruiz

Sunnyvale (CA) – The basics of today’s AMD Asset Smart announcement were known for some time. But now we know about the extent of the involved investment and the fact that AMD will unload a significant portion of its debt, become more nimble, build a new factory in upstate New York and expand an existing campus. And we should not forget that AMD credits former CEO Hector Ruiz as the architect of this deal, effectively securing the executives legacy. Of course, the devil is in the detail, and today’s announcement may hit one or the other roadblock.

In times of what is seen as an unprecedented financial storm, a huge investment in a generally volatile industry and especially a company that has shown to be extremely vulnerable over the past 20 years should be seen as a success. And clearly, for AMD itself, the investment comes as good news as the massive cash infusion means that the company will not have to worry so much about next month’s bills anymore and focus on future products instead, even if that means that it will have to give up its treasured family jewels and control over its manufacturing facilities.

The finances

There are two separate investments – one targeting AMD’s manufacturing sites and one the chip development business of AMD.

AMD’s manufacturing unit will be spun off into a new company temporarily called “The Foundry Company” (TFC) and include AMD’s two fabrication facilities in Dresden, Germany, as well as related assets and intellectual property rights. Advanced Technology Investment Company (ATIC), an investment firmed owned by the government of Abu Dhabi, will invest $2.1 billion to purchase its stake in TFC. The new business will also assume $1.2 billion of AMD’s debt related to the construction of Fab 36 and ATIC said it will also commit to additional equity funding of a minimum of $3.6 billion and up to $6.0 billion over the next five years to fund the expansion of The Foundry Company’s chip-making capacity.

This expansion will include the construction of a $3+ billion 32 nm fab in Luther Forest, New York, as well as the expansion of the Dresden site with a new 300 mm fab that will be focusing on bulk chip manufacturing, which indicates this fab may actually be building AMD’s future graphics processors and not support the production of SOI CPUs. In exchange for its investment, ATIC will receive a 55.6% stake in TFC, while AMD will hold the remaining 44.4%. In recent months, we repeatedly heard that it may not be that easy to convince the New York government that there are no issues with a company that is owned by the Abu Dhabi government owning a chip factory in New York State.
 
The current political climate as well as the fact that oil money effectively purchases a majority stake in a big American chip company may add more unknown variable to those negotiations – which will begin “today”, we were told. However, AMD is expecting questions without any doubt and stressed that the new fab will create 1400 new jobs – and 5000 more in the region as a direct result of the new plant. TFC will launch with 3000 employees initially.

The second component of the deal is an investment in the “old” AMD. First, ATIC will pay AMD $700 million for ownership interests in TFC and a second Abu Dhabi-based investment firm, Mubadala Development Company - which is an existing 8.1% AMD shareholder – will increase its share to 19.3%: The firm purchases 58 million newly issued AMD shares and warrants for 30 million additional shares in exchange for $314 million in cash. Considering the fact that AMD’s market capitalization was recently below $2.5 billion, an 11.2% share can be considered as a decent deal for AMD in these times.

Hector Ruiz and everybody else

One of the most interesting components of the deal, besides the finances, was the future role of former AMD CEO Hector Ruiz, who recently stepped down and limited his efforts to being chairman of AMD. It was widely believed that AMD could not afford a golden parachute for the executive, who was not really a darling of analysts anymore, but was looking for a way to create an appropriate exit strategy for Ruiz.
Ruiz will not lead TFC, as it was previously expected: That role will be filled by Doug Grose, who will give up his current role as senior vice president of manufacturing operations to become chief executive officer to become CEO of TFC. However, Ruiz will become chairman of TFC and will “relinquish” his role as AMD’s executive chairman. “To augment its announced leadership, the new company plans an aggressive recruitment strategy to round out a world-class semiconductor manufacturing leadership team,” AMD said.

AMD CEO Dirk Meyer used the opportunity of a conference call with journalists to praise Ruiz as the architect of the separation of AMD. It was Ruiz’ “vision” that led to the “most important transition in AMD’s history,” Meyer said. Of course, that transition may not have been foreseen by company’s co-founder Jerry Sanders. As reported previously, Sanders left AMD in a similar, but not quite as dramatic, situation as Ruiz does today: The economy was in a terrible shape. AMD had just announced its third straight quarterly loss with no short term solution in sight. The difference between the two scenarios is that Ruiz was able to turn the company around back then, but was too much in a hole this time and a substantial outside investment was the only option to save the company. AMD’s existing relationship to the Mid-East and the current turmoil in the financial industry laid out the path for today’s announcement.

So, what about everybody else at AMD? CEO Meyer noted that there is a restructuring process in place and some people are likely to lose their jobs. However, the executive is quick to point out that the investment is about “creating jobs” and that 1400 people will be hired in Luther Forest, for example.

Short term, long term

There are several short term and long-term effects on AMD with this announcement. First, the development company becomes more nimble, on paper, and has a much lower breakeven point. It will also be able to shop for production rates to keep the production cost down, even if it has a big (minority) stake in TFC.

The greater focus on chip design should especially benefit the former ATI team, which has been gaining traction inside AMD lately and showed a successful rollout of several new products this year.

However, separating these two tangled up companies may take much longer than it sounds today. Essentially, two new company structures need to be created and the time that process will take may be measured in years, rather than months. For now, TFC will have AMD as its only customer, but as a foundry company it will rely on additional customers as well.
    
For AMD itself, it seems that this deal was a compromise of buying time against its rival in exchange for giving up the pride of the company – its manufacturing facilities. In the end, this deal may be a one-time get-out-of-jail-free card. AMD has bought itself another round to deliver products that can effectively compete with Intel. It is unlikely that another investment in this dimension will be possible in the near future.