IBM Looking to Sell Chip Manufacturing Operations

IBM Looking to Sell Chip Manufacturing Operations

DON CLARK And SPENCER E. ANTE

Feb. 6, 2014 10:13 p.m. ET

International Business Machines Corp. IBM +0.80% is exploring the sale of its semiconductor manufacturing operations, said a person familiar with the matter.

IBM operates factories that make computer chips for its own high-end server systems as well as for external customers. The company is looking for a buyer for the manufacturing operations, but plans to retain its chip-design capability, this person said.

Chip manufacturing is a very capital-intensive and volatile business. Shedding those operations could help boost IBM’s profitability, and dovetail with recent moves by the company to reduce its reliance on selling computer hardware.

IBM recently struck a deal to sell its low-end server business to Lenovo Group Ltd.0992.HK +0.72% IBM still makes mainframes and high-end servers based on internally designed chips, though sales of servers that use the Unix operating system have been tumbling in recent quarters.

The Financial Times reported news of the sale plan earlier Thursday.

Toni Sacconaghi, an analyst at Sanford C. Bernstein, said in a recent interview that IBM has less of an economic rationale for its own chip manufacturing plants as the company focuses less on servers. IBM is also making fewer chips for external customers, giving it more of a reason to let go of the unit, he said.

The company’s factories were used to make chips used in the last generation of videogame consoles from Sony Corp. 6758.TO +2.59% and Microsoft Corp.MSFT +1.01%

, but both companies shifted their latest machines to chips from Advanced Micro Devices Inc. AMD +3.02% IBM still makes chips used in Nintendo Co.7974.TO +0.62% ‘s Wii system.

In the nine months ending September 30, 2013, sales of IBM’s microelectronics unit fell about 3%, according to the most recent financial filing.

Bernstein estimates that the unit generated about $1.75 billion in revenue last year, while losing $130 million in pretax income. It predicts the unit will shrink to $1.45 billion in revenue in 2014, while losing another $130 million in pretax income.

In 2000, IBM announced a $2.5 billion investment to build a cutting-edge computer chip fabrication plant in East Fishkill, N.Y., then the largest capital investment in its history. The investment was part of a total $5 billion capital investment plan to support IBM’s semiconductor business around the world.

Besides the cost of chip factories and equipment, which frequently run into billions of dollars, IBM and other companies spend heavily on developing new production recipes to keep improving the performance, data-storage capacity and cost of chips.

IBM for years has tried to share the costs of developing new processes with other semiconductor makers, in some cases relying on facilities established at the State University of New York at Albany.

 

 

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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