NEW YORK (CNN/Money) -
Is semiconductor company Advanced Micro Devices getting ready for a spinoff of its flash memory business?
Shares of AMD -- Intel's main rival -- have shot up nearly 25 percent this week and analysts who follow the company say a big reason was a report on Wednesday by Credit Suisse First Boston analyst Tim Mahon.
In that report, Mahon wrote that he expects AMD to announce a spinoff next week of its flash memory assets into a new company that will include a flash memory manufacturing joint venture AMD has with Japanese electronics company Fujitsu called Fujitsu AMD Semiconductor Limited (FASL) in addition to other flash assets owned by AMD and Fujitsu.
Flash memory chips are a key component in wireless devices such as cell phones and personal digital assistants (PDA). The chips preserve data when the devices are turned off.
A spokeswoman for AMD would not comment on Mahon's report, saying it is the company's policy to not discuss rumors and speculation.
Flash for cash
But Wall Street is buzzing about the possibility of a spinoff. Nearly a third of AMD's fourth-quarter revenue came from flash memory chips. The majority of AMD's sales come from microprocessors such as its Athlon line of chips, which compete with Intel's Pentium brand.
In the fourth quarter, AMD's flash memory sales were up 15 percent from the third quarter of 2002 and 11 percent from a year ago. And it is thought that AMD (AMD: Research, Estimates) has been gaining ground in the flash business against Intel in the first quarter as well.
Intel lowered its sales guidance earlier this month and blamed weak demand for flash memory as the main culprit. But analysts say one of the reasons for the shortfall was that Intel (INTC: Research, Estimates) unsuccessfully tried to raise the prices of flash memory chips and wound up losing market share as a result to companies like AMD and STMicroelectronics (STM: Research, Estimates).
Michael Cohen, director of research for Pacific American Securities, said that a spinoff of the flash business could make sense because it would give AMD a liquid asset that it can sell portions of in case it needs more cash. Cohen owns shares of AMD but his firm has no investment banking relationship with it.
The company has $1 billion in cash but $1.8 billion in long-term debt. What's more, AMD reported a net loss of $60.6 million in 2001 and a loss of $1.3 billion last year. Analysts expect the company to post a loss in 2003 as well.
Separation anxiety?
Eric Ross, an analyst with Investec, said that splitting up the company's microprocessor and flash businesses would be a good idea because it could help AMD compete more effectively against Intel in both areas. Ross doesn't own the stock and Investec has no investment banking relationship with AMD.
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AMD and Fujitsu have equal ownership stakes in FASL but Mahon wrote that he expects AMD to take a majority stake of 60 percent in the spinoff company and that Fujitsu will own the rest. Mahon declined to be interviewed further about the report.
Ross said that fully integrating the Fujitsu and AMD flash businesses into a new company controlled by AMD would be a stronger competitor since it would likely be more efficient and have an easier time expanding than it would as a subsidiary of AMD.
"Flash and processors are more viable as separate companies," said Ross.
Still, not everyone agrees that a spinoff is the answer to AMD's problems. The fact that flash has done well while microprocessors have not might be a good reason to not split the company in two, said Alex Vallecillo, senior portfolio manager with National City Investment Management, subadviser of the Armada family of funds. He does not own AMD.
"AMD should keep flash memory for the diversification benefits of it," said Vallecillo. "Flash memory gives AMD something to talk about when the microprocessors results are weak."
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