By Charles King, Pund-IT, Inc. October 20, 2014
IBM and GlobalFoundries announced that they have signed a definitive agreement under which GlobalFoundries will acquire IBM’s global commercial semiconductor technology business, including intellectual property, personnel and technologies related to IBM Microelectronics. GlobalFoundries will also become IBM’s exclusive server processor semiconductor technology provider for 22 nanometer (nm), 14nm and 10nm semiconductors for the next decade.
According to IBM, the agreement will enable it to focus on fundamental semiconductor research and the development of future cloud, mobile, big data analytics and secure transaction-optimized systems. The company will continue its previously announced five year/$3 billion investment in semiconductor research to lead in the next generation of computing. GlobalFoundries will have primary access to that research through joint collaboration at the Colleges of Nanoscale Science and Engineering (CNSE), SUNY Polytechnic Institute, in Albany, N.Y.
The deal will provide GlobalFoundries substantial intellectual property including thousands of patents, making it the holder of one of the world’s largest semiconductor IP portfolios. The company will also benefit from IBM’s technical teams, which will aid its path to advanced process geometries at 10nm and below. Additionally, the acquisition will open up business opportunities in radio frequency (RF) and specialty technologies, as well as ASIC design capabilities.
GlobalFoundries will acquire and operate IBM’s semiconductor manufacturing operations and facilities in East Fishkill, New York and Essex Junction, Vermont. The company plans to provide employment opportunities for substantially all IBM employees at the two facilities, except for a team of semiconductor server group employees who will remain with IBM. GlobalFoundries will also acquire IBM’s commercial microelectronics business, which it plans to invest in and grow.
IBM will reflect a pre-tax charge of $4.7 billion in its financial results for the third quarter of 2014, including an asset impairment, estimated costs to sell the IBM microelectronics business and cash consideration of $1.5B to GlobalFoundries. That consideration is expected to be paid to GlobalFoundries by IBM over the next three years, and will be adjusted by the amount of working capital which is estimated to be $200 million.
IBM exits/GlobalFoundries expands semiconductor manufacturing.
Semiconductors and microprocessors are so central to IT products that they are often thought of as homogenous entities that spring to life in a single, uniform effort. That is a serious misconception. Instead, these technologies and solutions come about through a confluence of three related yet also essentially separate processes:
- Design – The efforts that go into creating individual chip components and assembling them into synergistic microprocessor solutions
- Materials Science – The complex research and development efforts underlying new and next generation semiconductor technology discoveries and innovations
- Manufacturing – The processes that leverage design and materials science advancements to build and produce chips in commercially sustainable quantities
This last point is critical to understanding the IBM/GlobalFoundries deal. That’s because the first two elements of IBM’s microprocessor business – the design and materials science portions – are essentially unaffected by the sale. In fact, the company will bolster those efforts by retaining a team of semiconductor server group employees.
Why would IBM and GlobalFoundries pursue such an agreement? The fact is that semiconductor and microprocessor manufacturing are cash-intensive efforts that require billions of dollars in continuing investments. That’s especially the case during the generational leaps in fab production that IBM noted in its announcement, from 22nm to 14nm and 10nm.
With market leader Intel well-ensconced in 22nm (Ivy Bridge) production and heading firmly toward 14nm (Broadwell) processes, deciding how best to proceed was critical for both IBM and GlobalFoundries. In the end, the pair determined that pursuing an immediate sale and close collaboration after the deal closes was optimal for them both.
In essence, the deal allows IBM to escape a portion of its business that, while miniscule in terms of revenues created, required significant, margin-impacting investments. Plus, the deal should allow the company to direct its energies toward the cloud, mobile, big data analytics and security technologies that it believes represent future market opportunities and growth.
While the deal includes some financial risks for GlobalFoundries (which is how it leveraged $1.5B in cash payments from IBM over the next five years), the company also stands to reap substantial benefits. First of all, the sale will deliver an immediate boost capacity boost to GlobalFoundries manufacturing capabilities. In addition, the company will be the exclusive maker of chips for IBM Power Systems and System z mainframes for the coming decade – both the leading platforms in their respective markets.
GlobalFoundries is also likely to profit from IBM ASIC, RF and other patents and IP to compete in new markets. Finally, the company could and should become the manufacturing partner of choice for the members the OpenPOWER Foundation that are developing new solutions based on IBM’s POWER architecture.
In essence, IBM’s decision to sell its global commercial semiconductor technology business to GlobalFoundries was based on achieving its business and earnings targets. Since the company will retain its related design and research assets and personnel, the agreement should have little if any impact on IBM’s technical innovation and market leadership.
More broadly speaking, the deal also brings the company’s form and strategy under CEO Virginia Rometty into clearer focus. In some ways, Rometty has labored under the shadow of previous IBM CEO Sam Palmisano who set a firm course for the company and the customer and shareholder expectations it aimed to meet or exceed. But IBM, its markets and the wider world are different today than they were when Palmisano left the CEO role in January 2012.
Since then, Rometty has proved herself to be an executive in the classic IBM style. However, agreements like the sale of the company’s System x organization to Lenovo and, now, the deal with GlobalFoundries have also allowed IBM to better pursue its business goals while preserving its core, differentiating technologies. Those achievements are worthy of applause and offer proof of how the company will continue to move forward under Rometty’s leadership.
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