Chip maker Advanced Micro Devices Inc plans to spin off its manufacturing plants into a $5.7 billion joint venture with Abu Dhabi to get a cash injection and shrink debt to better compete against larger rival Intel Corp.
AMD shares jumped 18 percent to $5 on Tuesday after Wall Street waited for months for the struggling chip maker to formulate its so-called "smart asset" strategy to focus more on chip design and less on costly factories.
Advanced Technology Investment Company (ATIC), an Abu Dhabi state-owned venture capital firm, said it will invest $2.1 billion for a 55.6 percent stake in the venture, of which $700 million will go directly to AMD, which will hold the remaining stake. The two will divide the venture's board seats equally.
ATIC also committed to investing another $3.6 billion to $6.0 billion over 5 years to fund the venture's expansion. The 3,000-person new company will hold AMD's two plants in Dresden, Germany and make all of its central processing units, as well as chips for other companies.
Another Abu Dhabi government company, Mubadala Development Co, will spend $314 million to increase its stake in AMD to 19.3 percent from 8.1 percent and gain a seat on AMD's board.
Brian Mata, an analyst at IC Insights in Arizona, said AMD desperately needed the boost. The company has posted seven consecutive quarters of losses and is forecast by Wall Street to report another quarterly loss next week.
"The key thing is the financial backing from Abu Dhabi because AMD was essentially out of money," said Mata.
He said AMD can focus on design and has the money to try to catch up with Intel, but the new venture has a challenge competing with existing contract chip manufacturers.
"The foundry business is already pretty entrenched," he said, citing Taiwan Semiconductor Manufacturing Co Ltd, United Microelectronics Corp, Singapore's Chartered Semiconductor Manufacturing Ltd and China's Semiconductor Manufacturing International Corp.
In the short term, Rick Hsu, a semiconductor analyst at Nomura in Taipei, said the new venture won't have major impact on TSMC and UMC, which have larger economies of scale, advanced technology and a wide customer base.
"I don't see any major impact until after 2010," Hsu said. "The new company will only have a very small market share in the beginning, maybe 5 percent in the first year."
However, Hsu said the new entrant could become a competitor in the longer term if it moves up the tech ladder and boosts its product portfolios.
