IBM faces roadblocks with sale of server, semiconductor businesses

International Business Machines Corp. is expected to accomplish two important transactions this year: it is projected to complete sale of its x86 server division to Lenovo Group and it is rumoured that the company will also agree to sell its semiconductor manufacturing business to GlobalFoundries. However, the U.S. regulators may not let the company to get rid of the two business units.

Since IBM sells x86 servers to the U.S. government and various national security organizations, any business transaction concerning the server division should be approved by the Committee on Foreign Investment in the U.S. (CFIUS), an organization that monitors deals with possible national-security implications. The CFIUS needs to ensure that after IBM sells its server business unit to Lenovo (which has financial ties with a Chinese state entity) it will be impossible to access them remotely from China or compromise anyhow during maintenance, reports the Wall Street Journal.

IBM and Lenovo already faced similar issues when the latter bought PC business of the former in 2004 – 2005. While the CFIUS ultimately approved the deal, the U.S. military later alerted Defense Department about security incidents involving the Lenovo-branded PCs, and the State Department banned their use on its top secret networks in the U.S. and abroad.

Today, the two companies are in similar circumstances. Only this time the concerns are more serious since servers hold dramatically more data than PCs. IBM proposes to service Lenovo servers for five years after the transaction is completed and then renew the contract if needed. While the CFIUS may approve the deal, the U.S. authorities may cease buying such servers.

Due to national security concerns of the U.S. authorities IBM may also face problems with selling off its semiconductor operations to GlobalFoundries. IBM’s 200mm facility in Burlington, Vermont, still produces certain high-end radar and other components for the U.S. government using SiGe and SOI processes, reports EETimes. That business is valued at around $500 million a year. The U.S. authorities demand that fabs producing such chips would belong to the U.S. companies, which will make it virtually impossible to sell such facility to GlobalFoundries, which is controlled by Abu Dhabi’s Mubadala.

“There's a direct link to the US government with the trusted foundry business, so that would have to stay in U.S. hands,” said a former Burlington employee.

IBM, Lenovo and Globalfoundries did not comment on the news-story. Earlier this year IBM was confident that the U.S. regulators would okay the server deal with Lenovo.

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KitGuru Says: Many market observers say that it is a big mistake of IBM to sell off the x86 server division now. Perhaps, if the CFIUS blocks the deal, IBM will actually concentrate on reorganization of the unit to make it profitable and growing. Meanwhile, it is completely unclear what will happen to IBM’s semiconductor business. It is almost impossible to upgrade the existing facilities to make the division profitable and it is also impossible to sell it to a foreign investor.

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