AMD manufacturing plan key to chipmaker's future

The company has also reported seven straight quarterly net losses in a row, and it's hard-pressed to afford building a new, next-generation chip plant, which can cost $3.5 billion, with $5.6 billion in long-term debt on its books.

Together, Intel and AMD control virtually the entire market for microprocessors, the electronic brains of personal computers and server computers that comprise corporate networks.

AMD's future hinges on what it calls Asset-Smart strategy: whether it adds capacity by striking a deal to use foundries of an Asian contract chipmaker such as Taiwan Semiconductor Manufacturing Co Ltd, or perhaps signing an agreement with longtime partner International Business Machines Corp.

“I don't know what Asset-Smart looks like, but anything is better than today. Anything is better than going out of business because you run out of money” said Stifel Nicolaus analyst Cody Acree. “It might be a partnership with IBM or TSMC or it might be an outright sale of their manufacturing.”

Executive Chairman Hector Ruiz, who led AMD as its CEO for more than six years and stepped aside in mid-July to hand the reins to Dirk Meyer, is driving the plan to completion and has repeatedly promised answers by the end of the year.

Shares of AMD have slumped from more than $40 a share in March 2006 to a little more than $5 today. Those of Intel now trade at about $24, versus a bit over $20 in March 2006.

Certainly, AMD could try to stay the course and compete against manufacturing powerhouse Intel by maintaining its own chip plants, but AMD simply doesn't have the market share and the cash-generating ability to fund such a venture, analysts say.

Whatever AMD's final deal - there are complicating factors including a cross-licensing agreement that AMD and Intel have had for decades and which expires in 2010 - analysts expect AMD to get a sizable infusion of cash from its partner and to skirt having to fund the cost of building new plants and buying new chipmaking tools.

AMD has already raised some money to stem cash flow problems by selling more than $600 million in AMD stock in December to an Abu Dhabi investment fund. And the cash from a new deal could go either to AMD or to fund a new joint venture, analysts said.

Analysts have, among other possibilities, speculated that the Gulf state could furnish the cash while an Asian contract chipmaker such as TSMC or Chartered Semiconductor Manufacturing Ltd could make the processors for AMD.

Such a joint venture - with AMD holding a 51% majority stake to satisfy the Intel-AMD cross license, which analysts say limits the percentage of AMD chips that can be made by outside companies - would also lift from AMD the risk of underutilized chip factories should demand evaporate.

The so-called fabless model is already in use by other large chipmakers, such as Texas Instruments Inc, which a few years ago shifted production of its wireless chips to Asian contract chipmakers.

By doing so, TI has in the last couple of years returned $6 billion to investors through share repurchases and the payment of dividends, instead of using that to build new plants.

Intel and memory chipmaker Micron Technology Inc formed their own joint venture, with Intel ponying up the money and Micron the facilities to make the memory chips.

“That's something we might expect to see, where AMD donates the fabs and the other partner donates cash,” said Citigroup analyst Glen Yeung. “It wouldn't surprise me if Hector (Ruiz) played a role in running that new joint venture company.”

Another compelling reason for AMD to strike a joint-venture deal with an Asian contract chipmaker like TSMC or Chartered is that the foundries now have leading-edge chipmaking capabilities, something they did not five or 10 years ago, analysts said.

“Foundries have moved up to a viable model of leading-edge lithography that wasn't there before,” Acree said. “AMD is now looking to take advantage of that.”

Already, AMD, because of its purchase of Canadian graphics chipmaker ATI, has a sizable portion of its chipmaking capacity being handled by an outsider. ATI has used TSMC as the contract chipmaker for its products, which AMD inherited.

Doug Young, an analyst with American Technology Research, said that in his view Asset-Smart wouldn't change everything, but it would help AMD solve its cash flow problems.

“Your investment thesis in AMD has to be that they introduce unique products and return good cash flow to the product side of the business, with the assumption that they're going to be much more like a fabless company than one that is paying for their own process development.” (Reuters)