Summary: IBM has reported that it will pay Globalfoundries $1.5 billion as part of a ten-year deal to take over an unprofitable chip that hurt IBM’s revenue.
Bloomberg reports that International Business Machines Corp. (IBM) has agreed to pay Globalfoundries Inc. $1.5 billion to get rid of an unprofitable chip-manufacturing unit.
The $1.5 billion will be paid over a three-year period. Globalfoundries will become the exclusive provider of IBM’s specific Power processors for the next decade in exchange for access to IBM’s intellectual property. IBM will take a $4.7 billion third-quarter pretax charge.
The negotiations have been back and forth for months between the two companies. Ginni Rometty, Chief Executive Officer of IBM, closed the deal to get rid of the unit, which has dragged down IBM’s earnings. Globalfoundries, which is owned by an investment arm of Abu Dhabi’s government, will take over the unit. Its engineers will analyze the semiconductor design and manufacturing.
Tom Rosamilia, IBM’s senior vice president of the systems and technology group and integrated supply chain, said, “IBM has always taken the long view of its business strategy, continuously reinventing.” He called the deal with Globalfoundries “one more step in the company’s reinvention.”
The cash amount paid by IBM will be partially offset by $200 million of working capital. IBM’s third-quarter charge will make up for both the cash payment and a non-cash writedown of the business in the amount of $2.4 billion.
Globalfoundries will obtain and operate manufacturing plants in Essex Junction, Vermont and East Fishkill, New York. It will also add IBM’s commercial microelectronics business and plans to provide positions for all IBM employees, with the exception of one group that will remain with IBM.
The 10-year deal, which includes the exchange of thousands of patents, will allow Globalfoundries to use landmark chipmaking technology and will guarantee a supply of chips that IBM requires for its various systems, such as its Watson data-analytics technology and mainframe computers. IBM said in a statement, “While IBM has world-class technology and intellectual property, the company has lacked scale. As a subscale business, IBM’s microelectronic business has been generated losses.” The business will be categorized as a discontinued operation, which had a pretax loss of $400 million the first half of 2014, and a $700 million loss in 2013.
IBM’s third-quarter earnings report is expected to state that shares rose to $4.32. That figure includes a drop in revenue for the 10th quarter in a row. IBM is determined to reach $18 a share in adjusted earnings this year as the company works to stay current with the cloud computing trend. This is all included in IBM’s five-year plan to increase profits by 2015.
The semiconductors, which include the PowerPC lineup, have been implemented in game machines, personal computers, and other electronics. However, Intel Corp. continues to rule the processor market, which pushes IBM aside in the industry.
Manufacturing microelectronics makes up less than 2 percent of IBM’s revenue. IBM was already part of an alliance with Globalfoundries which was created in a branch of Advanced Micro Devices Inc.’s production centers in 2009 to create chip-production technology. IBM was hunting for a buyer for the chipmaking division since at least last year, and earlier in 2014 IBM focused on finding a joint-venturer partner after it could not find an acquirer.
Finally, IBM offered $1 billion to Globalfoundries to take the unit, but Globalfoundries wanted closer to $2 billion to offset the unit’s losses. Throughout the deal discussions, Globalfoundries was mainly interested in acquiring the engineers and intellectual property of IBM, as opposed to its manufacturing facilities. Therefore, Globalfoundries will gain IBM’s manufacturing-related intellectual property, and IBM will retain the systems-related intellectual property. Its licensing income will gradually decrease over time.
IBM, though it will exit the chip manufacturing business, will continue to invest in semiconductors. IBM wanted to maintain control of the design and intellectual property of the chips that are placed in its products. Over the next five years, roughly $3 billion will be spent on semiconductor research and development.
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