AMD's foundry spin-off may save company

AMS's decision to spin off its chip-manufacturing business into a separate company just may save the floundering firm, analysts said.

AMD's decision to split into a chip-designing company and a chipmaking company should help return the company to profitability sooner, said several analysts who watch the chipmaking industry. AMD would remain as the chip-designing company, while the new company, tentatively called The Foundry Co., would focus on chipmaking under the plan, unveiled Tuesday.

[ See this related story on AMD splitting up into two companies. ]

"I think this is a good move for AMD, especially in the current financial environment," said Dean McCarron, principal analyst for Mercury Research. "It frees AMD of the heavy-debt burden of owning a fab and lets it focus on its primary microprocessor and graphics businesses."

The move should allow AMD to return to profitability much faster than if it kept its foundry business, and it allows AMD to stop worrying about underuse of factories during economic downturns, McCarron added.

But the move is not without risks, added Jack Gold, founder and principal analyst at J.Gold Associates. The Foundry Co., despite a huge investment from the Advanced Technology Investment Company (ATIC), faces a competitive marketplace, Gold said. ATIC is a company set up by the government of Abu Dhabi to invest in tech companies worldwide. It will invest $1.4 billion directly in The Foundry Co. and pay another $700 million to AMD, giving it 55.6 percent of the new company. AMD will own the rest of the company.

The Foundry Co. will assume about $1.2 billion of AMD's debt. AMD's revenue from continuing operations for the second quarter of 2008 rose 3 percent from a year earlier, to $1.35 billion. However, the company posted a net loss of $1.19 billion for the quarter.

"AMD gets a sorely needed cash infusion," Gold said. "But the new company will need to get business in the door from other players, not just AMD, if it is to be successful longer-term. While semi-outsourcing to foundries is a major trend in the industry, it is also highly competitive and not always a good margin business."

Most analysts suggested the deal will put some added pressure on AMD competitor Intel.

"This is good for Intel in that it will offer renewed competition for Intel, which will in turn require it to maintain market leadership in designs and especially in its fabs," Gold said. "Intel has not always been the low-cost producer, and this deal will likely force it to see how it can cost-reduce and 'lean out' its manufacturing, which it has been doing already anyway."

Gold sees little potential for a negative impact to Intel, he said. "In fact, anything that makes AMD more competitive forces Intel to increase its own innovation, which is good for everyone -- Intel, system vendors, and consumers," he added.

The deal should put pressure on Intel to improve its technology, added Roger Kay, president of Endpoint Technologies Associates.