GlobalFoundries Acquires IBM’s Semiconductor Manufacturing Business; IBM Bows Outby Ryan Smith on October 20, 2014 3:00 PM EST
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The history of the semiconductor manufacturing business is both a story of great success and great failure. On the one hand semiconductor manufacturing has allowed the creation of devices that have transformed society, and unusual for most technologies it has remarkably improved at a steady rate for over 40 years now, making Moore’s Law a reality. On the other hand the history of the semiconductor business has been one of a constant weed-out process, as every generation of technology has seen the number of players narrow as the cost and complexity of semiconductor manufacturing continues to grow. Compared to the early days only the richest and most powerful firms have survived, and today the price of progression has claimed another player: IBM.
Today IBM has announced a remarkable, though not entirely unexpected deal. The company is announcing that they are transferring the bulk of their semiconductor business over to GlobalFoundries, essentially divesting themselves of the business entirely and getting out of chip fabricating altogether. But in a deal that is all too indicative of just how brutal the semiconductor manufacturing business is, IBM is not selling the business to GlobalFoundries or even giving it away for free; today’s deal will see IBM pay GlobalFoundries to take the business, with IBM handing over $1.5 billion in cash and working capital to GlobalFoundries in order to entice them to take over the business.
A deal of some time in the making, IBM’s divestment of its semiconductor manufacturing business comes as a result of the business’s continued technological and financial troubles. The business has lost money for quite some time now as IBM has struggled to attract business to keep their fabs at capacity, as IBM’s POWER chip manufacturing volume isn’t enough to sustain the business on its own. Compounding matters, IBM has been behind the curve in process technology development, which has seen competitors and partners alike such as TSMC and Samsung take the lead in rolling out new manufacturing nodes and securing the lucrative contracts that come with being the leader.
IBM East Fishkill (Image Courtesy Dutchess County Economic Development Corporation)
By divesting themselves of their semiconductor manufacturing business, IBM is cutting loose a business that is losing them money, but it is also a necessary step to enable the consolidation of manufacturing rather than a dissolution of the business entirely. Though in better shape than IBM’s business, GlobalFoundries has their own struggles with technology and volume, so taking on IBM’s business will allow the two businesses to be consolidated and ideally a larger, stronger semiconductor manufacturer to emerge.
Overall then, the deal sees GlobalFoundries taking on everything related to semiconductor manufacturing from IBM except for IBM’s semiconductor R&D division, which IBM will hold on to. This means GlobalFoundries is acquiring IBM’s existing fabs in Fishkill and Essex Junction, IBM’s engineers and other technical experts outside of their retained R&D division, IBM’s extensive semiconductor patent pool, and their commercial microelectronics (contract manufacturing) business. The importance of IBM’s manufacturing expertise in particular should not be understated, as while IBM hasn’t been a cutting-edge foundry, their expertise will be an important factor in helping GlobalFoundries narrow the gap with its competition and prosper. Meanwhile to cap things off, GlobalFoundries will also be acquiring IBM’s foundry patronage, with IBM signing up to use GlobalFoundries for their 22nm, 14nm, and 10nm chips for the next 10 years.
Finally, this acquisition also calls into question the future of the Common Platform alliance, the manufacturing alliance between IBM, GlobalFoundries, and Samsung. With IBM essentially bowing out of everything other than R&D and GlobalFoundries licensing Samsung’s 14nm process rather than licensing IBM’s or developing their own, Samsung is now the strongest member in a party of 2. How GlobalFoundries and Samsung continue this relationship – and more importantly GlobalFoundries’ role as a developer versus a customer/licensee – remains to be seen.
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Murloc - Monday, October 20, 2014 - linkI don't understand why IBM couldn't just stop the business if they're having to pay GlobalFoundries to take it.
Unless the deal partially includes in some way the 10 years of manufacturing for IBM.
The other possibility is them having some social responsibility.
Khenglish - Monday, October 20, 2014 - linkSo I made a post relevant to the topic but can't post it because, "This comment is apparently spam and we do not allow spam comments."
But I can post this. Go figure.
Ryan Smith - Monday, October 20, 2014 - linkThe short answer is that IBM still needs someone to make their chips, and they need that someone to offer the specific processes that IBM wants.
raulr - Monday, October 20, 2014 - linkWas wondering the same thing. Maybe severance and unemployment compensation would cost nearly as much anyway?
TiGr1982 - Monday, October 20, 2014 - link@ reulr
No, IBM hires and fires a lot of people each year, so probably it's not mainly severance/compensation;
I think, Ryan (AT) is right: to continue providing their solutions ("IBM is a solutions company"), IBM needs POWER and System Z hardware, and the dies for this hardware need to be produced somewhere, and it would be an unnecessary and expensive overhead to move this production to, say, TSMC (say, Oracle's SPARCs are produced by TSMC, if I'm not mistaken). So, these IBM (from now on: GF) fabs will live - because IBM needs the POWER and System Z dies they manufacture.
TiGr1982 - Monday, October 20, 2014 - linkSorry, "raulr", no comment editing feat here...
Impulses - Tuesday, October 21, 2014 - linkWhat exactly is a solutions company? They've now gotten rid of everything related to hardware no? First the PC business, then servers, now the silicon foundries... I'm probably being grossly ignorant but what the heck do they do now?
R&D/custom enterprise software/consulting?
niva - Tuesday, October 21, 2014 - linkYup, mostly R&D, developing patents, datamining and working with massive databases and infrastructure algorithms. IBM has really transformed itself going from purely manufacturing company to a purely intellectual labor one.
pfdman - Tuesday, October 21, 2014 - linkOne has to assume that IBM had contracts with customers to manufacture semiconductors for them. Even though IBM wants to get out of the business, those contracts with their customers need to be fulfilled. So they can't just throw their hands up in the air and say they don't want to make semiconductors anymore because those contracts would require them to pay penalties. In most cases IBM has probably already received some form of down payment for those contracts from their customers. So Global Foundries gets all the physical and intellectual assets of IBM's semiconductor business, but they also get with it the liabilities of these contracts which need to be fulfilled. In that case, IBM is also handing over cash to Global Foundries so they will honor and complete those contracts, and IBM won't need to pay any fees or penalties for breaking them.
name99 - Monday, October 20, 2014 - linkIt's naive to treat the $1.5billion as a sort of admission of failure on IBM's part.
IBM plans to keep using the fabs to manufacture its own chips, so there is tremendous flexibility for shifting costs around so as to optimize either tax issues or PR issues for either party. Basically the $1.5 billion is just an upfront payment against usage fees over the next ten years, but structuring this way benefits at least, maybe both parties.