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.

Source: Bloomberg

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  • tipoo - Monday, October 20, 2014 - link

    Some of their fabs were trusted fabs, meaning there were contracts with the US government for manufacturing that could not be broken with shutting the fabs down. It's why IBM paid someone to *take* the fabs.
  • Kalessian - Tuesday, October 21, 2014 - link

    Added to the above contractual obligations, I would guess that a lot of their expensive equipment is leased in some way. Just a guess, though
  • Samus - Tuesday, October 21, 2014 - link

    Because if IBM doesn't help out GF, then there will be no GF to buy from (because without this deal, GF would be next to fail)

    IBM is effectively propping up GF.
  • Arnulf - Monday, October 20, 2014 - link

    From penultimate paragraph:

    "The important of IBM’s manufacturing expertise in particular"

    Importance ?
  • Achtung_BG - Monday, October 20, 2014 - link

    Very interesting. Most impressed me this:

    "IBM is now expected to pay GlobalFoundries $1.5 billion in cash over the next three years. That sum will be adjusted by the amount of working capital, estimated to be $200 million, according to the statement.

    IBM will still invest $3 billion over five years in semiconductor technology research, the results of which GlobalFoundries will have “primary” access to"

    Flobulfondries not want to fall out of the top league and reach the position of the UMC.
    After the license agreement with Samsung for 14nm and now this. look like a serious player who wants a share of 10nm
  • Khenglish - Monday, October 20, 2014 - link

    I can't think of a more mismanaged company than IBM that turns a profit. The fact that they gave away around 8B worth of fabs and 1.5B in cash is a testament to how badly they're screwed up.

    IBM invented, but squandered and sold off their Personal Computer, Dynamic Memory (today's DDR3, DDR4, GDDR5 market), and hard drive divisions. Don't tell me that they strategically bowed out. Each of these are multibillion dollar industries that many companies still turn a profit in. If IBM was well run they'd still be at the top of these fields and be the largest company that ever existed. It's sad to see a company that was once so innovative let itself whither away to nothing.

    Note: AT forums flags lists as spam. Please fix this.
  • TiGr1982 - Monday, October 20, 2014 - link

    Read more on current IBM on the web and you'll see what people are saying; the overall impression is their top managers in the last 10 years are effectively transforming them to the services and consulting company, and most of the other businesses they had are already sold/given away to somebody else in the IT industry.

    Talking hardware, it's like now they essentially only have their own System Z, POWER and some custom storage stuff at their disposal. The rest is services/consulting/research and so on. So, some people think it's time for them to rename themselves into IBS (International Business Services) or IBC (International Business Consulting) :)
    It's not not good or bad by itself, people are just saying it's just a state of things with them.
  • sheh - Monday, October 20, 2014 - link

    Maybe it works for them, assuming they're after making more money rather than selling more products. IBM is about as large, revenue/profit-wise, as Intel+Western Digital+Seagate+Micron.
  • hpglow - Monday, October 20, 2014 - link

    Intel has given fabs away as well just not often. They had one loosing money in my town back during the P4 days. It would have cost so much to decommission the "tools" (what intel calls fab equipment) and the hazardous chemicals attached to them that they just gave the building with evreything in it to the city. They took out a few tools and sold them mostly to Chinese fans. The city made use of the office space there and just locked people out of the fab building because they couldn't guarantee it was clean after they spent 2 years paying people to clean it.
  • errorr - Monday, October 20, 2014 - link

    You are missing the point. This is just another step in the reinvention of IBM. This business was a money loser, the x86 business was a few Billion at best. The Software Business fluctuates between $45 and $50 Billion. The Integrator side is about the same size.

    IBM still is a massive patent and R&D machine but that process has moved more and more to software. When you hear someone say software is eating the world it also means that that is where the money will be. Watson is the future. The hardware is largely irrelevant for that type of Big Data usage.

    I care about hardware because it is neat but you can't pretend that it matters anywhere as much as software in the real world. Even Apple, a hardware company would only sell pretty phones if the software wasn't exclusive.

    The great strides in the future will all be on the software side, hardware is useful only as much as it runs software faster and cheaper.

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