Isn't it nice to see a stock price shoot up by 30% on a dreary morning like this one?
That's how Advanced Micro Devices (NYSE: AMD ) opened up this morning, thanks to the unveiling of its long-awaited "asset smart" strategy. In its perpetual underdog position under PC chip chief Intel (Nasdaq: INTC ) , AMD has taken on billions of dollars of debt to finance the expensive production facilities and their never-ending upgrades. You can't afford to fall far behind in the manufacturing process race if you hope to compete with one of the world's finest innovators that has around an 80% stranglehold on the chip market.
How smart are your assets?
The new strategy splits off AMD's manufacturing plants into a new joint venture with two investment arms of the United Arab Emirates' government. Eleven months ago, the Mubadala Group injected $614 million into AMD's anemic coffers and took an 8% stake in the company. The Arab investors are picking up another 58 million freshly minted AMD shares for $314 million, growing their stake to 19%. At the same time, the Advanced Technology Investment Company of Abu Dhabi takes on $1.2 billion of AMD's long-term debt and contributes at least $3.6 billion to the new Foundry Company's bank accounts.
Texas Instruments (NYSE: TXN ) made a similar move three years ago, and its proven success with wider margins and flexible manufacturing options has inspired a wave of asset-light or "fabless" chip designers following in its large footprints. The Foundry Company with its German facilities and plans to build new factories in upstate New York and Abu Dhabi jumps into a market with a heavy focus on Southeast Asia.
Chartered Semiconductor Manufacturing (Nasdaq: CHRT ) runs five factories, all in Singapore. Taiwan Semiconductor (NYSE: TSM ) owns one plant in Washington state and 11 in Asia, and United Microelectronics (NYSE: UMC ) stretches from Taiwan to Singapore and Japan. Another smaller player works entirely out of China. A Euro-American foundry that makes more than just AMD/ATI chips could make fabless Westerners like Atheros (Nasdaq: ATHR ) very happy. There's definitely an untapped business opportunity here. Oil prices and their effect on overseas shipping rates alone could be enough to encourage some chip shops to bring their manufacturing orders back home.
Down and dirty
AMD CEO Dirk Meyer calls the agreement "a landmark day for AMD, creating a financially stronger company with a tightened focus." I think he's right. The company will still own about 45% of the manufacturing joint venture, but most of the financial burden of keeping it competitive falls on the Abu Dhabi investors.
A lighter balance sheet obviously makes tons of sense these days, and the new AMD should be able to compete fiercely with Intel once again. Management's options have been limited by financial constraints for years, and the company also had to decide whether it wanted to be a world-class chip manufacturing expert or a top-notch semiconductor designer. No more of that fence-sitting, boys.
So I think that the 12% stronger stock price is entirely justified, and just the start of a new chapter in AMD history. Don't forget that these shares were worth five times as much two short years ago, and there's lots of pessimism priced into them even after this quick upswing. AMD is not a safe harbor in stormy seas, and probably never will be. But I saw some exciting opportunities on the horizon even before this announcement, and the unexpectedly generous balance sheet makeover unlocks plenty of new doors.
Watch out, Intel. AMD is coming for you, and has never been leaner or meaner.