Time working against AMD’s asset-light plans

The clock is ticking for Advanced Micro Devices.

As part of AMD’s efforts to recover from the damaging delay of its Barcelona quad-core processor in 2007, the chip maker wants to spin off its two manufacturing plants, called fabs, as part of a strategy called asset light. The move will turn AMD into a fabless chip maker, reliant on contract chip makers to produce all of its chips but no longer saddled with the massive capital expenditures and R&D programs required to keep pace with advances in semiconductor technology.

Spinning off the manufacturing division would also give AMD, which is burdened with US$5 billion in long-term debt, a badly needed infusion of cash. AMD executives hope this strategy will turn the company into a more formidable competitor for Intel.

There’s just one problem: AMD hasn’t found a buyer.

AMD has two plants, Fab 36 and Fab 38, both located in Dresden, Germany. The newer plant, Fab 36, makes chips using 300-millimeter wafers, which offer better economies of scale than the 200-millimeter wafers used in older plants. The other one, Fab 38, started out using 200-millimeter wafers and is in the process of switching to 300-millimeter wafers, a transition that should be complete early next year.

One of the reasons AMD hasn’t found a buyer for these plants is that the company continues to lose money, to the tune of US$1.2 billion during the second quarter alone. That loss helped push down the value of shareholders’ equity in the chip maker to $1.5 billion, down from $3 billion at the end of 2007.

During the same period, the amount of cash held by the company fell from $1.9 billion to $1.6 billion.

Coupled with expectations that AMD will continue to report net losses for the rest of this year, these financial factors make it more difficult to sell off the chip plants, said Craig Berger, an analyst at Friedman, Billings, Ramsey & Co., in a research note.

“We think the logistics of getting such a deal done are very challenging, particularly with AMD’s equity value and cash position falling everyday. After all, why would a firm want to do a deal with AMD today when it can just wait a little longer and do the deal even cheaper?” he wrote.

Nevertheless, AMD executives are counting on a deal to unload these plants and shore up the company’s balance sheet. The Barcelona product problems are history and AMD has been hitting milestones laid out on its roadmap with regularity this year. Most recently, the release of the company’s Puma notebook platform and its latest ATI graphics cards gave the company a boost.

There’s more to come in the months ahead. Later this year, AMD plans to release an improved version of its quad-core server chips, called Shanghai, and will introduce a line of processors in 2009 that combines multiple CPU cores and a graphics processor on a single piece of silicon. But given the scale of AMD’s financial problems, great technology and products are not enough to restore the company’s financial health in a relatively short period of time.

To that end, AMD executives want the company’s fabs sold off as soon as possible.

During a July conference call with investors, Hector Ruiz, AMD’s chairman and former CEO, who is overseeing the asset-light plans, told analysts he expected a deal to be completed by the end of this year. That timing is critical. During the same call, AMD CFO Robert Rivet warned he would feel “nervous” if the company’s cash fell to $800 million, suggesting AMD would need to turn to the capital markets at that point.

That could happen during the first quarter of 2009, when the company is estimated to have $855 million in cash left, Berger said.

“We are assuming that AMD does not reach operating profitability in 2009 and will not successfully transition to an asset-light strategy by the end of the year,” he wrote.

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