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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. By the end of the decade, it will exceed $ 1 billion globally, up from $ 500 billion this year, according to forecasts. VLSI Research, an analyst firm. Demand continues to exceed supply; the chip shortage is now expected to last until 2023, crippling factories of anything that needs processors, which these days is basically everything. Western governments have allocated billions of dollars to building chip manufacturing capabilities within their borders to become less dependent on Asian suppliers. America alone plans to spend $ 52 billion over the next five years.

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In this context, the IPO (Initial Public Offering) from GlobalFoundries, a subcontractor that makes chips for other companies, seems a safe bet. The company, which unveiled its prospectus on Oct. 4 and is expected to be listed soon, is the world’s fourth-largest chip foundry by revenue. The typical characteristics of a Initial Public Offering– a low offer price and a small proportion of shares available to public investors, which have yet to be decided – should ensure a healthy “pop” in the share price at the start of trading. But GloFo, as semiconductor enthusiasts affectionately call the company, is also an example of how tough the chip industry is, despite the favorable climate.

GloFo is a consolidation product, caused by the ruthless economics of the industry which demands ever smaller silicon grooves and therefore ever more expensive manufacturing plants (or “fabs”). The most advanced of them now cost more than $ 20 billion a piece. After a spin-off in 2009 from AMD, which designs processors for personal computers and servers in data centers, GloFo subsequently acquired Chartered Semiconductor, another foundry, and the chipmaking company of IBM, a supplier of assorted information technology articles.

With billions from Mubadala Investment Company, a sovereign wealth fund in the United Arab Emirates, which currently owns 100% of GloFo, the company has tried to follow its rivals in the race to forge cutting-edge electronic circuits. In 2018, she gave up and started targeting the lower end of the market. These are semiconductors that go into products like cars and machine tools, so they don’t need the highest performing processors, rather than data centers or smartphones. That niche still represents a $ 54 billion market, according to Gartner, another market researcher.

Today, GloFo operates a handful of factories around the world, employs approximately 15,000 people and has a 7% market share in the chip manufacturing industry. Most of its clients, including AMD, Broadcom, another American chip designer, and NXP, a Dutch, are “single-source”. This means that their chips cannot be made by other foundries, such as Samsung of South Korea and especially Taiwan Semiconductor Manufacturing Company (TSMC), the world’s largest chipmaker, which controls more than half of the market.

The size difference is a big part of why TSMC is extremely profitable while GloFo struggles to generate cash. In the first six months of this year, the Taiwanese giant posted sales of $ 26 billion and profits of $ 9.8 billion. Although GloFo’s revenue reached $ 3 billion in the same period, up almost 13% from a year ago, and its accounting losses have narrowed, it still lost $ 300 million between January and June.

Investing in GloFo will therefore be a bet that the company can ride the current tailwinds in its industry and start making a lot of money. But it may also be a gamble that another company will grab GloFo for itself. In July, it emerged that Intel, the world’s largest chipmaker by revenue, was in buyout talks with the company. These came to nothing because the parties could not agree on a price. Once GloFo is listed, its value should be clearer. Negotiations could resume. Then again, with GloFo’s figures now public, Intel may have a hard time convincing its shareholders that it has to pay the $ 25 billion GloFo is expected to recover.

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This article appeared in the Business section of the print edition under the headline “A Golden Age”