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IBM, continuing to shed money-losing businesses that are not central to its core efforts around such areas as big data analytics and the cloud, will pay chip foundry Globalfoundries $1.5 billion to take Big Blue’s semiconductor business off its hands.
The deal, which executives announced Oct. 20 along with the company’s disappointing third-quarter financial results, comes less than a month after IBM closed the $2.1 billion deal that sent its low-end x86 server business to Lenovo.
The move comes as IBM looks to quickly adjust to a more mobile- and cloud-based tech world that is moving away from the kinds of proprietary offerings that IBM and other established vendors—such as Cisco Systems and Oracle—have made their riches on over the past several decades. Enterprises increasingly are favoring open cloud systems over tightly integrated, proprietary solutions, according to Patrick Moorhead, principal analyst with Moor Insights and Strategy.
“Even if [a business is] doing a private cloud, they don’t want to do it on a proprietary platform, and that’s what you get with IBM,” Moorhead told eWEEK.
Speculation about IBM’s interest in selling its semiconductor business began circulating earlier this year, soon after the x86 server deal with Lenovo was announced.
According to the deal, Globalfoundries will get IBM’s existing semiconductor manufacturing operations in East Fishkill, N.Y., and Essex Junction, Vt., and officials said they plan to offer jobs to “substantially all IBM employees at the two facilities.” Once the deal closes next year, the chip foundry also will get IBM’s commercial microelectronics business, from ASICs to manufacturing to sales.
For IBM, the deal lets it crawl out from under a business that some analysts said has lost more than $1 billion over the past several years and was continuing to see declining demand, forcing the expensive manufacturing facilities to operate at less than scale and becoming a financial burden on the company. IBM has become the only consumer of its Power chips; had lost the performance edge it once held over Intel’s x86 server chips; was no longer selling its chips to Microsoft, Nintendo and Sony for their gaming consoles (a business taken over by Advanced Micro Devices); and had little hope of gaining any traction in the booming mobile chip space dominated by ARM and its manufacturing partners.
“Thus, the odd terms of the deal, which has IBM paying Globalfoundries, like some garbage hauler, to take the material away,” Roger Kay, principal analyst with Endpoint Technologies Associates, wrote in a column on Forbes.com.
IBM—along with such partners as Google, Nvidia and Mellanox Technologies—last year established the OpenPower Foundation to enable third parties to build their own Power-based server chips in hopes of extending the architecture’s reach and make it more competitive against Intel- and ARM-based processors. How well that will work is up for debate.
“IBM is working like mad to shift to an open model, but it might be a case of ‘too little, too late,'” Moorhead said. “OpenPower may have been interesting three or four years ago.”
IBM to Pay Globalfoundries $1.5 Billion to Take Chip Business
However, while IBM may be giving up the chip manufacturing business, it’s not stepping away from semiconductors altogether. The company plans to continue its plans to spend $3 billion over the next five years on projects that will help shrink current processor architecture to as small as 7 nanometers and to investigate options for what will replace traditional silicon chip architecture when it reaches its physical limitations. Company officials announced the effort in July.
Moorhead said IBM’s decision to stick with the $3 billion plan made little sense for a company that is giving up with chip manufacturing business, and wondered whether Big Blue was looking to sell its chip research business.
In a post on the company blog, Tom Rosamilia, senior vice president of IBM’s Systems and Technology Group and Integrated Supply Chain, said the company will continue to invest in its Power servers—the company launched its Power8 systems in April—mainframes and storage systems even as the company looks to grow its cloud and big data efforts, and argued that semiconductor research is a key part of those strategies.
“We are going to lead in creating highly differentiated servers and storage systems that can manage the latest big data, cloud, mobile and cognitive workloads,” Rosamilia wrote.
IBM is in a difficult position as it tries to pivot away from what made it such a major tech vendor in the past and adapt to a changing environment where the focus is on more open infrastructures. Moorhead said enterprise executives—after hearing about the open architectures top-tier Web companies like Facebook and Google are using and efforts like the Open Compute Project—are scrutinizing the type of packaged hardware, software and services deals that companies like IBM, Oracle and SAP are known for. Those companies are coming late to the cloud and are behind the likes of Hewlett-Packard and Dell in embracing the OpenStack cloud orchestration platform, and now they’re trying hard to catch up, he said.
IBM’s struggles can be seen in its financial numbers, with revenues in the third quarter falling 4 percent over the same period last year and net income declining 17 percent.
“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,” Ginni Rometty, IBM chairman, president and CEO, said in a statement. “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.”
IBM to Pay Globalfoundries $1.5 Billion to Take Chip Business
Part of that effort is getting rid of underperforming or commoditized businesses, according to IBM’s Rosamilia.
“IBM has always taken the long view of its business strategy, continuously reinventing—from divesting its PC business to more recently its x86 business,” he wrote, adding that the Globalfoundries deal was another example. “IBM’s proven model for success is driven by focusing on the high-value segments of our systems portfolio driven by the unique innovation that only IBM can bring. Globalfoundries’ business model is to innovate through high-volume semiconductor manufacturing, which is enhanced by economies of scale.”
For Globalfoundries, the deal could be a boon, according to Endpoint Technologies’ Kay.
“IBM’s lemons may well be Globalfoundries’ lemonade, as the one key element that IBM has been unable to produce Globalfoundries has in spades: volume,” he wrote. “If Globalfoundries can get the [semiconductor] operations up to a decent scale, it can make money with them. And there are some real gems among the assets. IBM’s Application-specific integrated circuit (ASIC) specialty business and the radio-frequency (RF) parts that it sells to the phone industry are in high demand.”
Globalfoundries CEO Sanjay Jha broadens the company’s capabilities in the highly competitive foundry market, particularly as Globalfoundries looks to expand its presence in the mobile chip space.
“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,” Jha, former CEO of Motorola Mobility, said in a statement.