Pay to sell? Experts doubt IBM deal report

A report that IBM Corp. would have to pay up to get out of the chip-making business is the latest speculation about a potential deal with GlobalFoundries.

But not everyone in the semiconductor world is ready to buy the story about an upside-down deal.

Bloomberg said late Monday that a source close to the deal said IBM had offered to pay GlobalFoundries about $1 billion to take on the microelectronics manufacturing business of IBM, which it said was a money-losing division. Earlier reports had it the other way around, that IBM would sell the unit and collect.

Both companies have said they won't comment on whether there even was a deal in the making. About 7,000 people work for IBM in Dutchess County plants, many at the East Fishkill site that is Big Blue's primary chip producer.

Reaction to the Bloomberg report was chilly from Richard Doherty, research director of Envisioneering Group in Seaford, Nassau County.

"I don't give it 100 percent veracity by any means," he said.

At IC Insights, based in Scottsdale, Arizona, analyst Rob Lineback said, "It would surprise me that IBM would be paying a significant amount just to get the thing off of their hands." Though he added, "Maybe they have to sweeten the pot a little bit."

The idea is not absurd, though it is unusual. The underlying facts are that IBM's semiconductor business has had shrinking revenues at a time when the capital costs to upgrade chip fabricating plants have gone well into the billions. Cutting out diminishing or money-losing lines of business is a practice IBM has followed before, notably when it abandoned personal computers, and then the hard-disk drive business, both after losses. It is waiting for government approvals to sell its x86-based line of computers to Lenovo of China.

IBM said in its annual report that microelectronics revenue fell 11.9 percent in 2013; its external revenue fell 14.4 percent. It said its "original equipment manufacturer" revenue, which is the making of components, mostly chips, has been on the slide for two years. In 2011, it was $1.98 billion; in 2013, it had dropped to $1.49 billion.

IBM does not report profit and loss by divisions, but Toni Sacconaghi, analyst with broker Sanford Bernstein, was quoted in The Wall Street Journal saying the chip unit had lost $130 million in pre-tax income last year and was on track to do the same this year.

IBM got into chips to support its computers, like the mainframes made in Poughkeepsie, but also has won contracts with outside chip customers. Any deal that IBM would make would therefore need to provide a continued supply for those clients, Lineback said.

"They would probably have to have all their customers sign off on the transfer," he said. "When a company is sold, the people that are having their product manufactured there tend to be worried about how that's going to work out. They depend on having good relationships within the foundry and contacts within the company."

Likewise, the company taking over must satisfy the new customers, "who would want to be briefed on how they're going to be treated by GlobalFoundries," Lineback said. It's not clear whether such deals are profit-making or loss-making, but if it's the latter, a buyer may want compensation or guarantees.

Rumors about large numbers should be greeted cautiously, Doherty said. First, some reports said it was a $1 billion sale being proposed. "And now, a billion to take it off your hands — it doesn't pass the sniff test," he said.

The Bloomberg report said the deal would have had IBM pay about $1 billion, but that GlobalFoundries wanted closer to $2 billion.

Craig Wolf: 845-437-4815; cwolf@poughkeepsiejournal.com; Twitter: @craigwolfPJ