AMD swallows its pride and spins off chip-making plants

For years, Advanced Micro Devices Inc.’s scrappy image was best summed up by an insult that founder Jerry Sanders lobbed against rivals: “Real men have fabs.”

Sanders’ point was that, although many chip companies designed semiconductors and outsourced the manufacturing, AMD enjoyed the advantage of owning its factories, known as fabrication plants, or fabs.

Times have changed, though, and now so has AMD’s commitment to hanging on to those facilities, which have become a cash drain on the struggling company. The world’s No. 2 maker of microprocessors said Tuesday that it was spinning off its manufacturing operations in a deal with an investment arm of the Persian Gulf state of Abu Dhabi.

Advanced Technology Investment Co., AMD’s partner in the joint venture, has promised to contribute up to $8.1 billion over the next five years to upgrade AMD’s factories in Germany and help build another one in New York. Those factories will be absorbed into the new company, called Foundry Co.

The unusual deal, which will probably face U.S. government scrutiny because semiconductors are considered sensitive technologies, allows AMD to unload $1.2 billion of its $5.3 billion in debt onto the new company and focus on chip design. Foundry Co. will produce chips for AMD and other customers.

The move should help shore up AMD’s finances but it also highlights the company’s recognition that it can’t compete dollar-for-dollar on manufacturing against Silicon Valley rival Intel Corp., the world’s biggest semiconductor company.

Building ever-more sophisticated computer chips requires billions of dollars in factory upgrades every few years. With a market value more than 30 times that of AMD, Intel has vastly more resources to pour into developing new manufacturing technologies.

That dynamic pushed AMD in 2002 into a partnership with IBM Corp. to jointly develop new chip-making technologies, a relationship that will continue under AMD’s new structure.

“This isn’t sleight of hand -- this is a very hefty investment that helps clean up AMD’s balance sheet,” said JoAnne Feeney, senior research analyst with FTN Midwest Securities Corp. “This is the beginning of turning AMD around.”

AMD shares gained 36 cents, or 8.5%, to $4.59.

AMD also announced that Mubadala Development Co., an investment company whose sole shareholder is the government of Abu Dhabi, would pay $314 million to increase its stake in AMD to 19.3% from 8.1%.

Mubadala will get 58 million newly issued AMD shares and warrants for 30 million more. It also gets the right to nominate a candidate to AMD’s board of directors.

Between that deal and $700 million in cash from Advanced Technology, AMD’s assets will balloon by more than $1 billion.

The deals illustrate a broader trend of strapped American companies reaching out to foreign investors, particularly in oil-rich countries, for cash infusions at a time when the financial crisis in the U.S. has made big loans from traditional lenders hard to come by.

Mubadala has emerged as one of the world’s most active government-run investment vehicles in recent years.

In July, General Electric Co. agreed to a joint venture in which Mubadala will pump $4 billion into GE’s weakened commercial finance business.

Mubadala spokesman Richard Mintz declined to comment on the pending federal review of the AMD deals. But he predicted that U.S. officials would have a better understanding of the United Arab Emirates than they did when a political firestorm broke out over a proposed deal with a Dubai-based port operator in 2006.

Dirk Meyer, who became AMD’s chief executive after Hector Ruiz stepped down in July amid shareholder pressure, called the announcement a “hugely significant” deal for AMD.

“It really changes the financial model around how we pay for leading-edge semiconductor technology,” Meyer said.

Meyer said he’d thought a lot about Sanders’ “real men” remark and concluded that: “The times have changed. The economics have changed. And now smart men have foundries, and that’s what we have through our ownership of Foundry,” he said.