The GlobalFoundries IPO is perfectly timed

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IT LOOKS the perfect time to be a chipmaker. The semiconductor market continues to grow rapidly. It will exceed $ 1 trillion globally by the end of the decade, up from $ 500 billion this year VLSI Research, an analyst firm. Demand continues to outstrip supply; The chip shortage is now expected to last well into 2023 and paralyze factories of everything that requires processors – which is basically everything today. Western governments have allocated billions to build chip manufacturing capabilities within their borders to make them less dependent on Asian suppliers. America alone plans to spend $ 52 billion over the next five years.

In this context, the IPO (initial public offering) from GlobalFoundries, a contract manufacturer that makes chips for other companies, seems like a safe bet. The company, which published its prospectus on October 4th and is soon to be added to the list, is the fourth largest chip foundry in the world by sales. The typical characteristics of an initial public offering—A low offer price and a small percentage of shares available to public investors, both of which have yet to be decided — should ensure a healthy “pop” of the share price in the first few days of trading. But GloFo, as semiconductor enthusiasts graciously call the company, is also an example of how tough the chip business has become despite the favorable climate.

GloFo is a consolidation product caused by the irreconcilable economy of industry, which requires ever smaller silicon grooves and thus ever more expensive factories (or “fabs”). The most advanced of them now cost more than $ 20 billion a piece. After a spin-off in 2009 AMD, which develops processors for personal computers and servers in data centers, GloFo later acquired Chartered Semiconductor, another foundry, and the chip manufacturing business of IBM, a supplier of various information technology goods.

With billions from Mubadala Investment Company, a sovereign wealth fund from the United Arab Emirates that currently owns all GloFo, the company was trying to keep up with its rivals in the race to manufacture state-of-the-art electronic circuits. In 2018 it gave up and started serving the lower end of the market. These are semiconductors that are built into products such as cars or machine tools and therefore do not require the most powerful processors, but rather data centers or smartphones. According to another researcher, Gartner, that niche is still a $ 54 billion market.

Today GloFo operates a handful of fabs around the world, employs around 15,000 people, and has a 7% market share in chip manufacturing. Most of his clients, including AMD, Broadcom, another American chip designer, and NXP, a Dutch, are “single sourced”. This means that their chips are not made by other foundries such as Samsung from South Korea and in particular the Taiwan Semiconductor Manufacturing Company (TSMC), the most powerful chip maker in the world, which controls more than half of the market.

The difference in size explains very well why TSMC is hugely profitable, while GloFo is struggling to make money. For the first six months of this year, the Taiwanese giant had sales of $ 26 billion and profits of $ 9.8 billion. Although GloFo’s sales rose to $ 3 billion over the same period, nearly 13% year over year, and accounting losses have decreased, it still lost $ 300 million between January and June.

Investing in GloFo is therefore a bet that the company can ride the current tailwind in its industry and make serious money. But it can also be a bet that another company will pick up GloFo for itself. In July it emerged that Intel, the world’s largest chipmaker by sales, was in takeover talks with the company. These went nowhere as the parties could not agree on a price. Once GloFo is listed it should be more clear how much it is worth. Negotiations could be resumed. On the other hand, with GloFo’s numbers now released, Intel may have a hard time convincing its shareholders that it will have to pay the $ 25 billion that GloFo is expected to bring in.

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This article appeared in the business section of the print edition under the heading “A golden age”


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