Is IBM Dumping Its Chip Business?

By Paul Ausick Updated Apr 27, 11:56PM EDT · Published Feb 7, 7:40AM EST

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semiconductor

When International Business Machines Corp. (NYSE: IBM) sold its PC business to Lenovo in 2004, the deal marked the end of IBM’s participation in what had turned into a commodity business with little profit. The company also recently sold its low-end server business to Lenovo, and a report in the Financial Times cites unnamed sources who say IBM is also exploring a sale of its semiconductor business.

IBM currently designs and manufactures its own high-end server chips and also manufactures chips for external customers. A report in the Wall Street Journal says the company is looking for a buyer only for its chip manufacturing operations. The company reportedly will hold onto its chip-design operation.

Making chips is a capital-intensive business where very expensive equipment must be updated or new equipment purchased regularly in order to make chips at the latest scale. If IBM can dump its chip-making business, that should help its profitability.

What the company would give up by selling the business is an essential part of its history and, many observers believe, an important part of its future. An analyst told the Financial Times, “Take away the silicon part, and IBM may not be the tech giant it is 10 years from now.”

Revenues from IBM’s chip business fell 3% in the fourth quarter, and the company’s hardware revenue as a whole dropped 26% to $4.3 billion, about 15.5% of IBM’s total revenues for the quarter. For the full year the hardware business posted a loss of $500 million.

Holding on to the chip-making business would look like a sentimental decision rather than a business decision. Creating the designs and sending those out to contract manufacturers may make far more sense for the company.

IBM stock is inactive in Friday’s premarket trading, having closed at $174.67 on Thursday in a 52-week range of $172.19 to $215.90.

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About the Author Paul Ausick →

Paul Ausick has been writing for 247Wallst.com for more than a decade. He has written extensively on investing in the energy, defense, and technology sectors. In a previous life, he wrote technical documentation and managed a marketing communications group in Silicon Valley.

He has a bachelor's degree in English from the University of Chicago and now lives in Montana, where he fishes for trout in the summer and stays inside during the winter.