Struggling IBM pays $1.5 billion to dump its chipmaking business

IBM offloads unit to GlobalFoundries, but will still design its own chips.

Jon Brodkin – Oct 20, 2014 10:37 am | 105

The on/off switch from an IBM 26. Credit: Marcin Wichary

IBM announced today that GlobalFoundries will acquire its chip manufacturing business in a deal expected to close in 2015. IBM will pay GlobalFoundries $1.5 billion over the next three years to complete the transfer but will presumably save more than that over the long haul by offloading a costly chipmaking operation.

IBM designs the chips for its Power servers and mainframe computers and will continue to invest in chip research even after outsourcing manufacturing to GlobalFoundries. IBM is continuing a previously announced $3 billion investment over five years in semiconductor technology research, and the company said that “GlobalFoundries will have primary access to the research that results from this investment through joint collaboration at the Colleges of Nanoscale Science and Engineering (CNSE), SUNY Polytechnic Institute, in Albany, NY.” Additionally, GlobalFoundries will become “IBM’s exclusive server processor semiconductor technology provider for 22 nanometer (nm), 14nm and 10nm semiconductors for the next 10 years.”

GlobalFoundries will take over IBM manufacturing facilities in New York and Vermont, and the company “plans to provide employment opportunities for substantially all IBM employees at the two facilities who are part of the transferred businesses, except for a team of semiconductor server group employees who will remain with IBM.” GlobalFoundries will also acquire thousands of patents and IBM’s commercial microelectronics business.

GlobalFoundries was created in 2009 by AMD’s divestiture of its manufacturing business, and it currently makes chips for AMD, Broadcom, Qualcomm, and others. Although chip manufacturing was a cost sink for IBM, GlobalFoundries expects to use IBM’s facilities and intellectual property to expand its outsourcing business.

“We can now offer our customers a broader range of differentiated, leading-edge 3D transistor and RF technologies, and we will also improve our design ecosystem to accelerate time-to-revenue for our customers,” GlobalFoundries CEO Sanjay Jha said in the announcement.

The full cost

IBM took a $4.7 billion hit on its third quarter financial results due to the payment to GlobalFoundries, “asset impairment, [and] estimated costs to sell the IBM microelectronics business.”

IBM reported its financial results today, saying net income was $18 million after factoring in the GlobalFoundries deal. Revenue and net income from continuing operations (not including the GlobalFoundries deal) were down.

“We are disappointed in our performance,” IBM CEO Ginni Rometty said. “We saw a marked slowdown in September in client buying behavior, and our results also point to the unprecedented pace of change in our industry.”

Getting out of semiconductor manufacturing is part of IBM’s long-term shift toward higher-margin businesses. IBM also sold its x86 server business to Lenovo earlier this year.

“While we did not produce the results we expected to achieve, we again performed well in our strategic growth areas—cloud, data and analytics, security, social and mobile—where we continue to shift our business,” Rometty said. “We are executing on a clear strategy that is moving IBM to higher value, and we’ve taken significant actions to exit nonstrategic elements of the business. This includes the announcement that we will divest semiconductor manufacturing to focus on research and development that will differentiate our systems.”

UPDATE: IBM is keeping its semiconductor facility in Bromont, Quebec, The Globe and Mail reported. “Our Bromont facility retains its current mission, which is to develop and build advanced semiconductor packaging solutions for IBM server and storage products. It will also build custom logic modules for GlobalFoundries,” IBM told the newspaper. This is consistent with IBM’s announcement that one team of semiconductor server group employees will remain with IBM.