The Taiwanese had better watch out. Their chipmaking giants can see a powerful rival rising from the desert sands of Abu Dhabi.
The same investment firm that took the manufacturing arm of Advanced Micro Devices (NYSE: AMD) private earlier this year has sunk its teeth into Singapore-based chip manufacturing outfit Chartered Semiconductor Manufacturing (Nasdaq: CHRT) too.
In a $3.9 billion deal that includes straight-up share purchases for cash and a large debt exchange maneuver, Abu Dhabi's ATIC high-tech investment arm has lassoed Chartered. The largest shareholder owns 62% of Chartered shares and plans to vote "yes" on the deal. The two foundries will run side-by-side for a while and then merge into a single operation.
Regulatory approval should be a breeze since Chartered plus AMD's Globalfoundries adds up to no more than a contender for second place in the global chip-making market. Taiwan Semiconductor (NYSE: TSM) owns half of the market and United Microelectronics (NYSE: UMC) would run neck-and-neck with this new beast.
Chartered is another unprofitable chip foundry buried in heavy debt. The Arabs seem fond of injecting capital into that kind of operation. But the deal does make sense in many ways.
After the closing papers have been signed, ATIC will control chip factories on three continents with a fourth epicenter under construction in New York State. That global reach becomes a competitive advantage. Chartered comes with a distinguished customer list that includes giants like Qualcomm (Nasdaq: QCOM), up-and-comers like Atheros Communications (Nasdaq: ATHR), and even AMD's sworn rival in the graphics arena, NVIDIA (Nasdaq: NVDA). Exposure to a fine customer slate like that might be just what Globalfoundries needs in order to become a well-respected player in this market.
OK, so maybe Nvidia might demand that its chips never touch AMD's equipment, or take its ball and move to the Taiwanese providers altogether. But even so, this fusion suddenly brings unprecedented geographical reach together with a very respectable scale. Analysts fear a price war that could hurt the entire chip-making contractor industry, but as the newcomer, Abu Dhabi has the least to lose.
I own shares in both Taiwan Semi and AMD, so I'm both excited about this deal opening new opportunities and closing down old quasi-monopolies. On balance, I think I'll come out all right with two market-beating stocks over the long term. Does that make sense to you -- or am I insane? Tell me off in the comments below.
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