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ATIC ponies up $3.9bn to buy Chartered

Crunch time in the chip biz

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First AMD's foundry biz, and now Singapore's Chartered Semiconductor Manufacturing. Who will be next?

The Emirate of Abu Dhabi has lots of money, lots of sand, and lots of hydrocarbons that can presumably be made into nanotubes and other future computing technology when oil becomes scarce enough that carbon computing might be more profitable than burning oil distillates to move cars around the globe. So it makes sense for Advanced Technology Investment Company, an equity firm backed by the Abu Dhabi government, to have bought a controlling stake in GlobalFoundries, the wafer baker that was spun out of Advanced Micro Devices in March. That 55.6 per cent stake in GlobalFoundries cost ATIC $2.1bn plus its share of the investments in building the new fab.

Now, ATIC is taking control of Chartered, which like other semiconductor makers is losing money and struggling to navigate the very rough waters of the economic meltdown. To take control of Chartered, ATIC is coughing up $1.8bn in cash for the company's stock, which represents a 14.2 per cent premium compared to its trading average over the past 30 days. It has also agreed to cover another $2.1bn in debts and convertible preferred shares.

Temasek Holdings, which is an investment arm of the Singapore government much as ATIC is for Abu Dhabi, currently has a 62 per cent chunk of Chartered's shares and is backing the deal.

Chartered owns or controls six wafer bakers in Singapore, five that use 200mm wafers and one that uses 300mm wafers. It currently offers 40 and 45 nanometer chip processes and has been collaborating with IBM, AMD, and a number of other vendors to co-develop 22 nanometer technologies.

AMD has used Chartered as a second-source foundry in the past for 90 nanometer processes on its 300mm wafers - chip tech that Chartered got through a partnership with IBM Microelectronics. GlobalFoundries operates a chip fab in Dresden, Germany, which it got from AMD, now known as Fab 1. This factory uses 300mm wafers, and kicks out 45 nanometer Opteron chips (among other things) and will presumably be bringing 32 nanometer processes online later this year in preparation for future AMD chips.

In July, GlobalFoundries broke ground on a $4.2bn fab in upstate New York, to be called Fab 2, that will also use 300mm wafers and which will start out using 28 nanometer tech co-developed with IBM and others and which will eventually shrink to 22 nanometer processes when it hits full production in 2012.

ATIC says that the plan is to merge Chartered into GlobalFoundries, with Doug Grose, the latter company's chief executive officer, maintaining his role and Chia Song Hwee, currently CEO at Chartered, to become chief operating officer and spearheading the integration of the two companies.

The chip business is about scale and having the deep pockets to make the kinds of investments required to advance chip technology. So Chartered and its backers are keen on this deal. Especially if GlobalFoundries can land some of Toshiba's chip business, as the Financial Times reported was in the works as the ATIC deal was announced. The FT cites statistics from Gartner that peg the combined GlobalFoundries and Chartered biz at about 30 percent of the contract manufacturing in the chip market, well short of the 50 per cent share of Taiwan Semiconductor Manufacturing Company but ahead of United Microelectronics, also of Taiwan.

In a related story, Chartered raised its guidance for the third quarter, saying that it is seeing "incremental improvement" in its business, particularly with mature technologies. In a statement, Chartered CFO George Thomas said the company expected wafer shipments to rise by 24 per cent compared to the second quarter and that revenues would now be around $410m, plus or minus $5m, compared to the guidance given on July 24, when it was pegged at $388m, plus or minus $6m. Thanks to the higher revenues, the net loss for Q3 is now projected to be around $4m, plus or minus $4m, compared to $22m plus or minus $5m.

The question now is: when will IBM get bored with making the big investments necessary to keep pace in the chip racket? IBM has a tidy business selling various embedded Power chips in game consoles and a zillion other devices, and its Power Systems and mainframe lines benefit from having Big Blue design and make its own chips. Should IBM lose out on a deal for Sony, Microsoft, or Nintendo game consoles, it will be under great pressure to either get a new fab partner of its own or sell off the business. And if game console makers or other embedded chip users decide to shift to ARM or X64 architectures, Big Blue will quickly run out of patience. It would not be surprising at all to see IBM make use of GlobalFoundries for future Power8 and Power9 chips, if it comes to that, and just focus on the research into process and manufacturing that it can sell and make money on. ®

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