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JUNE 23, 2005
By Olga Kharif and Cliff Edwards For AMD, a Thorny Dilemma Its flash memory unit is a drag on earnings, but neither an IPO nor an outright sale appears likely to generate much enthusiasm Is chipmaker Advanced Micro Devices (AMD ) getting close to spinning off or selling its money-losing flash memory business? Documents recently filed with the Securities & Exchange Commission could be a prelude to either move. In April, AMD Chief Executive Hector Ruiz announced the outfit would be taking its Spansion flash memory business public after the division dragged down what would otherwise have been solid earnings in the first three months of the year. While Spansion contributed 36.4% of AMD's $1.2 billion sales in the quarter, which ended Mar. 27, it lost $110 million, leading to a net loss of $17.4 million. Spansion is a joint venture between AMD and Japanese electronics giant Fujitsu, with AMD holding the majority stake. TROUBLE SIGNS. Now the Sunnyvale, Calif., chipmaker is moving to shore up its balance sheet. On June 16, AMD filed amended documents with the SEC in which the company's lenders agreed to drop a requirement that the Spansion operation maintain a certain level of cash, approximately $44 million. Analysts say the move signals an impending spin-off or sale. "You strip the business of cash right before a spin-off or a sell-off," says Eric Ross, an analyst with investment firm ThinkEquity Partners in New York. Getting out of the flash memory business could help AMD shake its one-step forward, two-steps back reputation with investors. Even though it logged record server-chip sales in 2004, AMD has barely made a dent in gaining microprocessor market share against Intel (INTC ). An AMD spokesperson declined to comment on its plans, citing a pre-IPO quiet period, which began in April. With AMD at $18, as of the closing bell on June 22, the stock remains well off its 52-week high of about $25. This comes amid concerns that AMD, despite raves for its processor designs, is falling behind in the lucrative notebook segment of the chip market. On June 22, the outfit sought to regain momentum by announcing a key endorsement: HP's (HPQ ) new notebook models will use its Turion 64-bit mobile processor (see BW Online, 6/23/05, "Laptops: AMD Gets Inside"). FALLING SALES. Meanwhile, Intel hasn't been immune to losses in its flash business, either -- but the category represents only 7% of its sales, vs. a third of AMD's. Researchers at chip-sales tracking firm iSuppli say both Intel and AMD have been losing out because each sells a type of memory chip, called NOR, which is becoming less popular than the NAND version sold by Samsung and others. The two technologies differ in write and read speeds and, thus, often find different applications. A Spansion IPO could happen as early as this fall, says Tom Taulli, co-founder of mergers and acquisitions at consultancy Taulli Group. An IPO would slash AMD's ownership of the business to as little as 20%, estimates analyst Amrit Tewary of Standard & Poor's Equity Research. That's highly desirable for AMD, since the unit's financial results aren't likely to see a near-term improvement. Sales of NOR flash are expected to decline 18% in 2005, to $7.5 billion, with another 3% drop anticipated in 2006, figures Brian Matas, an analyst with chip consultancy IC Insights in Scottsdale, Ariz. ANY TAKERS? But AMD's financial performance, coupled with the downward trend for the type of flash memory it makes, could make a spin-off less than a hit with investors. "While we are big believers in the flash market, we are pretty attached to profits," says senior analyst Peter Hofstra at AIC Fund, based in Burlington, Ontario. Still, a newly minted stock could draw risk-takers. Some potential investors are still smarting from passing on shares of another chipmaker, Freescale Semiconductor (FSL ). Spun off last summer by Motorola amid heavy investor skepticism (MOT ), it has since seen it shares double, to $22. Would finding a buyer for Spansion be easier? Perhaps. Trouble is, AMD is unlikely to get anything close to the $2 billion to $3 billion investors had been hoping for. Fact is, in its current state, Spansion might not be worth much. NEEDING REHAB. "If they [sell it] for nothing, that would be more realistic," says ThinkEquity's Ross. Here's why: Spansion has fallen behind Intel in manufacturing technology, meaning each and every chip is more expensive to produce than those of its larger rival, says Ross. For Spansion to catch up, he estimates a buyer would need to pour between $1 billion and $2 billion into the memory supplier's factories over the next two years. Considering the obstacles, AMD may have a tough time trying to unload Spansion to investors or to a buyer.  Kharif is a reporter for BusinessWeek Online in Portland, Ore. Edwards is a correspondent in BusinessWeek's Silicon Valley bureau
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