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IBM Invests $3 Billion in Chip Research Amid Talks to Sell Unit

July 10 (Bloomberg) -- International Business Machines Corp. plans to spend $3 billion on semiconductor research and development in the next five years, even as the company is said to be selling its chip-manufacturing arm.

The company will fund two programs to create smaller, more powerful chips that can be used in systems like IBM’s Watson technology -- which analyzes data in plain English -- and to develop semiconductor parts out of materials other than silicon, according to a statement yesterday.

The investment underscores IBM’s plans to continue developing semiconductor technology at the same time it’s parting ways with its chip factories. The Armonk, New York-based company is nearing a deal to sell the chip-manufacturing business to Globalfoundries Inc., which is primarily interested in acquiring the unit’s engineers and intellectual property, people with knowledge of the matter said last month.

IBM wants to maintain control of the design and intellectual property of the chips it uses, a person familiar with the matter said in February.

“We fundamentally believe that no other company can do this level of innovation for the chip,” Tom Rosamilia, senior vice president of IBM’s systems and technology division, said in an interview, discussing the research spending plans. “Our clients are driving us to continue to innovate to this high-performance world. It’s all about the breakthroughs that are on the horizon that we see need to be done.”

He declined to comment on whether the move would sweeten a potential sale of the manufacturing unit, saying the investment is to advance research for IBM and the technology industry.

R&D Budget

The spending -- about $600 million a year, or 10 percent of IBM’s annual research and development budget -- also illustrates the company’s commitment to designing specialty semiconductors to run its mainframe, Power and Watson systems, Rosamilia said. He said he couldn’t provide figures for IBM’s semiconductor research and development over the past five years.

A sale of the manufacturing division of the chip business would let IBM divest a unit that has successfully developed technology to improve the chipmaking process, yet has trailed competitors in sales and profit.

IBM’s semiconductors, which include the PowerPC lineup, have been used in personal computers, game machines and other equipment. Still, Intel Corp.’s dominance in the processor market has left IBM with less of a role in the chip industry. Manufacturing microelectronics accounts for less than 2 percent of IBM’s $100 billion in annual revenue.

Money-Losing Unit

The company had been seeking a buyer for the division since at least last year, a person familiar with the matter said in February. The chip-manufacturing business loses as much as $1.5 billion a year, another person said last month.

IBM Chief Executive Officer Ginni Rometty has been divesting less-profitable businesses to help the company meet its 2015 earnings targets -- a goal made more difficult by eight consecutive quarters of declining revenue.

Rometty is also trying to complete the sale of IBM’s low-end server unit, which Beijing-based Lenovo Group Ltd. agreed to buy for $2.3 billion. The companies have sought more time for a U.S. national-security review of the deal, a person familiar with the matter said last month.

IBM is scheduled to report second-quarter earnings on July 17. Thanks to a 3.9 percent rally in July, the stock has recovered from losses earlier this year. The shares are up 0.5 percent in 2014, compared with a 6.7 percent gain in the Standard & Poor’s 500 Index.

To contact the reporter on this story: Alex Barinka in New York at abarinka2@bloomberg.net

To contact the editors responsible for this story: Sarah Rabil at srabil@bloomberg.net Crayton Harrison, John Lear

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