GlobalFoundries to acquire IBM microelectronics unit in $1.5bn deal

IBM will pay the Mubadala-owned company in cash over the next three years.

GlobalFoundries will become IBM’s exclusive provider for 22 nanometer (nm), 14nm and 10nm semiconductor chips for the next 10 years. Stan Honda / AFP

IBM will pay GlobalFoundries US$1.5 billion over the next three years for the Mubadala-owned company to take on its floundering microelectronics business.

IBM is shedding the unit to focus on the development of cloud computing, mobile and big data analytics and semiconductor research in which it has invested $3bn over five years.

GlobalFoundries, which is headquartered in New York, will acquire the intellectual property, engineers and assets related to IBM’s semiconductor business. According to Bloomberg the microelectronics business accounts for less than 2 per cent of IBM’s revenue, while the division loses as much as $1.5bn a year.

IBM’s shares slid by about 8 per cent after the announcement.

“This acquisition solidifies GlobalFoundries’ leadership position in semiconductor technology development and manufacturing,” said Sanjay Jha, the chief executive at GlobalFoundries.

“We can now offer our customers a broader range of differentiated leading-edge 3D transistor and radio frequency technologies.”

GlobalFoundries will become IBM’s exclusive provider for 22-nanometre (nm), 14nm and 10nm semiconductor chips for the next 10 years. These silicon chips are used in a vast array of gadgets from smartphones to sports cars.

“This acquisition enables IBM to focus on fundamental semiconductor and material science research, development capabilities and expertise in high-value systems,” said John Kelly, senior vice president and director of research at IBM.

Earlier this year it was reported that IBM had offered $1bn to persuade GlobalFoundries to take the unit off its hands, but the latter wanted $2bn, enough to offset the division’s losses.

Now GlobalFoundries will acquire and operate existing IBM semiconductor manufacturing operations and facilities in New York and Vermont with plans to keep all employees at the two facilities, except for a team of semiconductor server group employees who will remain with IBM.

The move is set to enhance the semiconductor industry in the US. GlobalFoundries is investing $10bn from 2014-15, mainly to expand its faciltiies in New York, where it has created 3,000 direct jobs.

It is planning to further invest in the new unit it has acquired to grow the business.

Anand Srinivasan, Bloomberg Intelligence senior semiconductor analyst said that for GlobalFoundries the deal expands capacity and cements its position as No 2 behind the global leader in chip manufacturing, Taiwan Semiconductor.

It is positive in terms of product positioning and where GlobalFoundries “wants to be”, he added.

Nord Samuelson, managing director at AlixPartners said that competition for research and development (R&D) in the semiconductor industry was fierce.

“We’re seeing a lot of consolidation in the industry to be able to keep up with R&D, with talent and acquisitions that revolve around IP. It’s consolidating to keep up with high costs,” he said.

IBM reported revenues of $22.4bn for the third quarter of this year, a decline of 4 per cent compared to a year earlier.

“We are disappointed in our performance,” said Ginni Rometty, the chief executive at IBM. “We saw a marked slowdown in September in client buying behaviour and our results also point out the unprecedented pace of change in our industry. 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 will reflect a pre-tax charge of $4.7bn in its financial results for the third quarter of the year, which includes an asset impairment, estimated costs to sell the IBM microelectronics business and cash consideration to GlobalFoundries.

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