Advanced Micro Devices Now Faces A Fabless Future

| About: Advanced Micro (AMD)

By Tejas Venkatesh

Advanced Micro Devices (NYSE:AMD) is now officially a fabless semiconductor company. Under the leadership of its recently installed CEO Rory Read, AMD has renegotiated the terms of its agreement with GLOBALFOUNDRIES (GF), finally relinquishing its stake in the chip-manufacturing arm that it originally spun off at the end of 2008.

It’s a complex arrangement, but the net result is that AMD no longer has to buy from GF and is free to play the market. That’s good for a number of reasons, not least being that problems ramping up 32nm and 28nm production at GF last year delayed the launches of both AMD’s Fusion graphics processors and Opteron CPU product rollouts, hurting its competitiveness against rivals Intel and NVIDIA (NASDAQ:NVDA) and directly hitting its bottom line.

AMD isn’t likely to use that trump card straight away. The company says it has no current plans to dual-source its Fusion APUs (the combined CPUs and GPU semiconductors that are crucial to its future), and it has agreed to set up a framework with GF to negotiate prices for wafer fabrication in 2013 – but that doesn’t mean it won’t be looking hard for better deals elsewhere, just as other fables semiconductor firms do as part of their daily business. AMD must be hoping that its freedom to go elsewhere will provide enough incentive for GF to stick more closely to its deadlines in the future. AMD already has a close relationship with GF rival Taiwan Semiconductor Manufacturing Company (NYSE:TSM), which acts as a second source for Fusion chipsets – and that relationship might well be deepened.

What does AMD lose along with its manufacturing arm? Preferential pricing, of course, because it was buying its wafers at cost from GF, and these will now be subject to a negotiated fixed-price contract, dependent on volumes. In SEC filings, AMD says it now expects to spend $1.5bn for wafer fabrication with GF in 2012 (up from $904m in 2011). On the other hand, it will spend less on R&D on the manufacturing side ($71m in 2012, down from $79m last year) – and nothing on capital manufacturing assets for the fab, which cost it $34m in 2011.

GLOBALFOUNDRIES, based around AMD’s original manufacturing facility in Dresden, Germany, was spun off with financial help from Advanced Technology Investment Company (ATIC) and Mubadala Development, both investment arms of the Abu Dhabi state. They took a 67% stake between them – ATIC 44.4% and Mubadala 19.3%. But in late 2009, ATIC announced the acquisition of Chartered Semiconductor for an enterprise value of roughly $4bn and set about combining it with GF, diluting AMD’s stake in the process. Further investments in a new facility in upstate New York took AMD’s stake below 10% by the end of last year.

Now AMD has transferred the remaining capital stock that it was holding in GF, 1.06 million shares worth $278m, back to the fab itself. Along with the stake goes the remainder of a five-year exclusive manufacturing arrangement. To get out of these commitments, AMD will pay GLOBALFOUNDRIES $425m over the next two years – an amount effectively replacing cash incentives that AMD had agreed to pay the fab in 2012 under the old agreement. The $278m and $425m payments will be recorded as a one-time charge on AMD’s Q1 balance sheet.