Tables are Turning

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Despite the global economic slowdown, Abu Dhabi has made a move to increase its stake in US-based Advanced Micro Devices (AMD), the world's second largest maker of computer processors. This transaction testifies to the ongoing vitality of United Arab Emirates (UAE) investment and the change in Western sentiment toward Gulf investment vehicles.



Advanced Technology Investment Company (ATIC), which was set up earlier on this year by the Mubadala Development Company, a government-owned investor, took a majority share ownership in AMD's manufacturing arm last week.



This is not Abu Dhabi's first foray into the world of IT. Mubadala already invested $622m in November 2007 for an 8% equity stake in AMD. This latest deal means Mubadala has boosted its stake in AMD to 19.4%, at a cost of $314m for 58m shares, in addition to warrants for an additional 30m shares.



The move comes as part of AMD's strategy to restructure its organisation and spin off its manufacturing operations in an attempt to cut costs. ATIC and AMD have agreed to set up a new company, to be temporarily called "the Foundry Company". ATIC will invest $2.1bn to purchase its majority 55.6% stake in the Foundry Company, of which $1.4bn will go directly to the operating capital of the new entity and $700m will be paid to AMD to purchase additional shares. The Foundry Company will also take on about $1.2bn, or approximately 24%, of AMD's existing debt. ATIC has also committed additional equity funding to the new company, which has been estimated at between $3.6bn and $6bn over the next five years.



The California-based chipmaker will benefit two-fold from the deal. Its 44.4% equity stake will ensure ongoing provision of custom-made chips, while being spared the manufacturing burden. By the same token, Mubadala will gain from a further diversified revenue stream.



It has been agreed that the board of directors will be represented equally from both companies and that AMD's senior vice-president in charge of manufacturing, Doug Grose, will become Foundry's CEO.



Meanwhile, the additional funds will be used to expand the Foundry Company's chip-making capacity at its factories in Dresden, Germany and begin construction on a new state-of-the art facility in Saratoga County, New York, subject to the transfer of previously-approved New York State incentives. The new facility is expected to generate more than 1400 direct jobs and an additional 5000 jobs in the region through its operation.



The hatchling firm will have to compete against established companies such as China's Semiconductor Manufacturing International Corporation, Taiwan-based Chartered Semiconductor and IBM Microelectronics, a unit of computing stalwart IBM.



It is thanks to record oil receipts in recent years that Abu Dhabi, which sits atop 95% of the UAE's oil, is capable of making such lofty deals. Pumping 2.6m barrels per day, the UAE capital, which is the world's sixth largest exporter of oil, has enjoyed a healthy current account surplus in recent years. Having such financial buoyancy has allowed the emirate to pursue its bold strategy of international investment, while the global credit squeeze has meant that many foreign economies are now welcoming international sovereign investment.



At the beginning of the year, political oratory against government investment vehicles was frequent. It came from critics, mostly European officials and US-based politicians, who felt investment could potentially be used to flex political muscle over strategic industries such as technology, instead of purely maximising government wealth.



Negative sentiment was even stronger last year, when DP World, a subsidiary of the Dubai government-owned Dubai World, had to sell off five US ports it had acquired when it bought out P&O, a move forced by the near hysterical reaction of American media and some politicians over an Arab company controlling strategic assets.



It seems, however, that the financial winds have changed, and along with them sentiment toward investment from cash-rich, resource-based economies. Given the collapse of some of Wall Street's biggest names last month, the need for capital to lubricate lending is now seen as essential in the West. The big question is where the money is going to come from to help capitalise troubled banks. Sovereign Wealth Funds (SWFs), once viewed with suspicion, are now being profiled as saviours to buttress global markets.



Mathew James, chief operating officer of Abu Dhabi Investment House told OBG, "The West now wants this money from funds and Abu Dhabi has done a fantastic job. They are a model of how these tools should be used."



Salah Al Shamsi, president of the Abu Dhabi Chamber of Commerce & Industry, believes that funding from the Gulf could help out in these difficult times. "Our investments are helping the world economy...People should look at our track record of investment and then judge. They can see clearly that the investment has been positive and rewarding for everyone," he said.



As the search for global capital has intensified, a group, co-chaired by Hamad Al Suwaidi, a director of the Abu Dhabi Investment Authority (Adia), representing an estimated $2.3tn in SWFs, presented a set of self-imposed voluntary principles to the International Monetary Fund (IMF) on October 11. Aimed at reducing concern that the funds might be acting for political motives, the move reflects the increasing importance of SWFs in the international monetary and financial system. "[...]We seek to ensure that the international investment environment will remain open and our capital can continue to be put to use when it is most needed," said Suwaidi in a statement.



In the past, sceptics in the West warned that sovereign funds, from places such as Abu Dhabi, may be putting too much money into their economies. Nowadays, however, it seems the same people are worried that cash-rich nations might not be ploughing enough in.

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