Financial Analysts Praise AMD for Acquiring SeaMicro, Selling Globalfoundries Stake

Market Observers Agree with AMD's Recent Transactions

by Anton Shilov
03/06/2012 | 11:35 PM

Financial analysts have welcome Advanced Micro Devices decision to sell off its stake in contract maker of semiconductors Globalfoundries and acquire SeaMicro manufacturer of micro-servers. Although this makes AMD "completely" fabless company without significant influence on its key manufacturing partner, the firm will be able to concentrate on development of chips and still negotiate good deals with Globalfoundries.


“We think it is good that AMD has managed to move to a wafer pricing agreement and still achieve reasonable profitability even with substandard yields in the near term,” said Patrick Wong, an analyst with Wells Fargo, reports Tech Trader Daily.

Under the terms of the recent agreements, GF granted AMD certain rights to contract with another wafer foundry supplier with respect to specified products for a specified period. In consideration for these rights, AMD agreed to pay Globalfoundries $425 million and transfer to GF all of the capital stock of GF that it owns. AMD will have to pay the contract maker of chips $1.5 billion this year, up from $904 million last year. Nonetheless, the company believes it will maintain its gross margin, which signals either considerably higher revenue, or better terms of pricing or considerably better yields.

"Possibly AMD will consider making some of its next generation APUs at Taiwan Semiconductor Manufacturing Company (TSMC). However, the arrangement involves a cash payment of $425 million to GF, to be paid over the next five quarters, and AMD will take a $703 million charge in the March 2012 quarter. We think it is unfortunate that AMD has had to make a cash payment to GF, on top of the recently announced acquisition of SeaMicro which involves $281 million in cash. However, it appears that the original agreement which this new agreement replaces included a comparable cash payment, of $430 million, and so the ultimate impact on AMD’s balance sheet may be similar to what it would have been under the old agreement," added Mr. Wong.

Thanks to "divorce" with Globalfoundries, AMD will gain flexibility in terms of choosing manufacturers of its products. For example, chips using one 28nm process technology can be made at GF, IBM and Samsung Electronics.

“The new WSA [wafer supply agreement] should help to calm some of the longer term concerns over AMD’s product roadmap and single-source dependency for 28nm process technology. [...] We see this as another example of how the company’s improved financial performance is allowing a degree of flexibility that would have been unheard of in prior years,” said Stacy Rasgon with Bernstein Research.

The financial analysts also welcome acquisition of SeaMicro manufacturer of micro-servers by AMD as it greatly improves the chipmaker's positions on the fastest growing segment of the market.

"The acquisition places it [AMD] at the center of the fastest growing segment of the server market: cloud computing. Future technology development will likely involve integrating SeaMicro technology with CPUs from a variety of sources. AMD needs to own the company, rather than just partner with it, to push that innovation," said Joanne Feeney with Longbow Research.

Technologies that AMD acquires with SeaMicro will help AMD to compete not only against traditional rival Intel Corp., but also against emerging ARM-based systems. In addition, SeaMicro will help to boost AMD's per-server revenue.

"The acquisition presents a potential threat to Intel's server dominance while upping the competitive ante vs. fellow ARM-based server players. [...] SeaMicro not only meets the needs for a more efficient server, it also maximizes total CPU as a percentage of total system cost. We view SeaMicro as a competitor to Dell/HP/IBM due to its power-optimized framework. And also to silicon vendors that would otherwise reduce total system power through a SoC," said Rick Schafer, an analyst of Oppenheimer & Co.