IBM Unloads Chip Biz To GF

Agrees to pay $1.5 billion to GlobalFoundries in wake of quarterly numbers miss, offers other gigantic perks.

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By Ed Sperling & Mark LaPedus
After months of on-again, off-again negotiations, IBM agreed to hand over its Microelectronics unit to GlobalFoundries for $1.5 billion—meaning IBM will actually pay GlobalFoundries that amount to get rid of what has become an albatross for Big Blue.

To really sweeten the deal, GlobalFoundries will become IBM’s exclusive server processor foundry for 22nm, 14nm and 10nm for the next 10 years. In addition, IBM said it would continue with its $3 billion research investment over the next five years to develop the next generation of computing. As part of the deal, GlobalFoundries will have what IBM terms “primary” access to research resulting from a collaborative effort between the Colleges of Nanoscale Science and Engineering and the State University of New York Polytechnic Institute in Albany, N.Y. On top of that, GlobalFoundries will receive thousands of patents in a deal that IBM said would give the foundry one of the largest semiconductor patent portfolios in the world.

The deal culminates months of negotiations, a brain drain from IBM in Essex Junction, Vermont, to GlobalFoundries in nearby Malta, N.Y., along with lots of haggling between the state of Vermont and IBM. The problem inside of Vermont stems from that state’s decision to decommission the Yankee nuclear power plant this quarter, which generates about 72% of the state’s electricity. IBM said the resulting increase in rates, beginning next year, would make its presence in Vermont economically difficult, and there have been  efforts to by some state officials to keep IBM where it is.

IBM runs an RF chip factory in Essex Junction, located just across the border from New York. That offers a substantial incremental opportunity for GlobalFoundries, particularly with the forthcoming emphasis on communication in the Internet of Things. IBM also will hand over its 300mm fab in East Fishkill, N.Y., although that is considered something of an aging facility by analysts.

GlobalFoundries said that it 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.

Still to be seen, however, is how the companies will deal with one key aspect to the sale. IBM has been a major chip supplier to the U.S. military for the better part of a century, but GlobalFoundries is owned by a United Arab Emirates company called Advanced Technology Investment Company, or ATIC, a subsidiary of the Emirate of Abu Dhabi.

“It is going to be interesting to note where ‘trusted foundry’ chips from the U.S. government will go to once the ownership of IBM’s chip manufacturing goes to GlobalFoundries. Micron and Intel seems like obvious choices,” said Srini Sundararajan, an analyst with Summit Research, in a research note. Many observers speculate that Intel would be the most likely candidate to assume the “trusted foundry” business from IBM.

Foundry landscape
In addition, the sale of IBM’s semiconductor unit to GlobalFoundries could add some interesting capabilities for the foundry, including deep process technology and expertise. But it won’t alter the foundry landscape in terms of overall market share, as GlobalFoundries and others still trail TSMC by a wide margin.

In 2013, GlobalFoundries was the world’s second largest foundry vendor with $4.261 billion in sales last year, according to the rankings from IC Insights. TSMC was (and still is) the leader in the foundry business with $19.85 billion in sales in 2013, according to IC Insights.

In comparison, IBM was ranked a mere 11th in the foundry business with $485 million in foundry sales in 2013, according to the firm. In 2012, IBM was also in 11th place in the foundry business with $432 million in sales in the area.

Still, GlobalFoundries and its technology partner, Samsung, are looking gain share against TSMC. TSMC recently said that its latest 16nm finFET technology won’t ship until late 2015, which is later than expected. As a result, TSMC may lose initial finFET orders from Apple and Qualcomm to two foundry rivals, GlobalFoundries and Samsung, according to analysts.

Last week, however, TSMC said it plans to speed up its finFET ramp. ”As 16nm finFET progress is ahead of schedule, TSMC now expects mass production for 16nm finFET to begin in late Q2 or early Q3 next year, compared to prior expectations of 4Q15. As a result, TSMC expects the share loss at 14nm/16nm finFET in 2015 to be lower than original expectations,” said Michael McConnell, an analyst with Pacific Crest Securities, in a research note.

Indeed, based on the current and future capital spending projections, the foundry business will remain fierce. In total, TSMC expects that its capital spending to be $9.6 billion for 2014 and slightly above $10 billion for 2015, according to Pacific Crest Securities. In total, GlobalFoundries expects that its capital spending to be $4.4 billion for 2014 and $5 billion for 2015, according to Pacific Crest Securities.

Last quarter, Intel reiterated that its 2014 capital spending would hit $11 billion, plus or minus $500 million. Samsung projects that its capital spending to be $13 billion for 2014 and $13.8 billion for 2015, according to the firm. This includes logic and memory.

Meanwhile, under the terms, IBM is expected to pay the $1.5 billion in cash to GlobalFoundries over the next three years. The company said it will take a pre-tax charge of $4.7 billion in Q3 of 2014, which includes an asset impairment, costs of sale, and cash. The sale had a huge impact on IBM’s already bad Q3 earnings report.