Report: IBM Ends Chip Business Buyout Search, Seeks Partner

IBM (IBM) reportedly has backpedaled from seeking a buyer for its semiconductor unit and instead decided to look for a joint-venture partner for the business, according to a Bloomberg report.

Even though word surfaced only last week that IBM was looking to unload its chip-making business, the company quietly has been trying to sell it for several months, the report said.

IBM’s about-face may have been prompted by its difficulty to secure bids from interested parties and also on its insistence on retaining chip design capabilities and its storehouse of intellectual property related to the semiconductor business, the report noted.

The Financial Times reported last week that IBM was mulling putting its semiconductor unit up for sale, some two weeks after unloading its x86 server arm for $2.3 billion to Chinese PC giant Lenovo. The vendor reportedly had enlisted Goldman Sachs to find interested parties but no possible suitors have emerged to this point, and it’s unclear how much IBM might be asking for the business.

One problem inherent in finding a buyer is the fact that there are only a few companies worldwide that can absorb the billions in capital required and have the fortitude to withstand the unpredictable nature of the silicon business.

For IBM, selling its semiconductor unit would have cemented its path away from hardware reliance and signaled a strategic determination that its future resides in cloud services and software. A joint venture partnership softens that landing a bit. Furthermore, once the Lenovo x86 deal closes, IBM will be left only with mainframe and high-end server manufacturing based on its own chips, leaving it to rely heavily on sales to outside customers to make ends meet with the unit. With the cost to build new fabs spiking to the billions of dollars, IBM’s return on investment may never rise to where it needs to be for the vendor to continue making silicon. A partner lightens that load as well. 

In Q4 2013, IBM reported its seventh consecutive quarter of declining revenue and its eighth straight period of missing analysts’ sales expectations, posting a 3 percent year-over-year downturn in sales to $27.7 billion. The vendor did beat earnings projections for a third straight time, however, posting a 6 percent bump in net income to $6.2 billion and a 12 percent-per-share increase to $5.73 for the period.

It’s easy to find IBM’s impetus for moving away from its hardware-related businesses, considering its continued poor performance, losing $500 million for the year in its Systems and Technology unit while its software unit posted a 4 percent sales increase and its cloud revenue jumped 69 percent for the year to $4.4 billion.

In response to the company’s continued sales dips, chief executive Ginni Rometty and other top executives declined their annual incentive payments for the year. Rometty maintains the company is on target to achieve its target of $20 earnings per share in 2015, contending that it expects to deliver full year 2014 GAAP earnings of at least $17 per share and non-GAAP of at least $18 per share.