AMD giants target intel

Analyst Opinion - AMD was in significant trouble: Up against a vastly larger and better funded competitor, the company was increasingly outmatched in recent months. This is because it has simply become too expensive to keep up the technology race. Sony, Texas Instruments, and Freescale had to exit the microprocessor segment, because the costs of staying in remained too great. This massive drop in competitors put AMD on a very ugly list and created a situation where it seemed that only one vendor could be driving the market in future and limit the amount innovation in a quickly changing, critical market.

Advantages

One of the big advantages of the new fabrication entity is that it won’t be public, which means that the costs typically associated with a public company like Intel and AMD won’t be incurred by this new entity. These costs aren’t trivial and have been one of the big drivers that took a number of companies private over the last several years. They are also huge distractions that can also substantially inhibit a company’s ability to execute.

In addition, because the fabrication company doesn’t have to please financial analysts or investors, it doesn’t have to worry about quarter to quarter performance and can invest strategically. This means, if it needs to, in order to gain a competitive advantage in say five years, it can invest to that goal and operate in the red to get there. A public company like Intel can’t do this because their investors won’t allow it, giving the fabrication company a potentially significant advantage.


Making it work

In effect, what is created is a more independent manufacturing entity that will be free to seek business from others. For instance, IBM is likely also not that interested in maintaining this technology race in fabrication and will likely find this new entity an ideal alternative for the firm’s own fabrication capability and risk a new plant would entail.

As this ramps up, the new foundry company should be able to gain additional economies of scale driving the overall cost of the manufactured product down. In addition, the funding source for this company does not come from traditional lenders, which have become vastly more difficult to work with in recent weeks. This strategy gives AMD the capability to build a New York fabrication facility and expand the Dresden campus in Germany with a new 300 mm facility.

This last, given current conditions, could deliver significant PR benefits and give AMD substantive political support which should pay additional dividends.

Risks

Typically, if you split a company in two parts in this way, there are significant risks. What if the foundry goes under or is bought by someone like Intel for instance? These risks appear to be mitigated by the folks doing the funding as they are investing heavily in both the new foundry company and AMD. In addition, the investors are operating under a long term strategy that anticipates their need for sustainable income after the oil Industry collapses which, by most projections, isn’t that far off.



Wrapping up

As a result of the deal, AMD has far fewer capital assets to manage and can focus more on the future rather than trying to dig the company out from the financial decisions of the past. AMD will also have approximately $2 billion in additional reserves and a vastly lower breakeven point. Finally, AMD will have an investor willing to step in, if required.
source:tgdaily.com