IBM to Pay Globalfoundries $1.5 Billion to Take Chip Unit

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International Business Machines Corp. agreed to pay Globalfoundries Inc. $1.5 billion to take an unprofitable chip-manufacturing unit off its hands.

IBM will pay Globalfoundries the cash over three years, the companies said in a statement today. Globalfoundries will be IBM’s exclusive provider of specific Power processors for the next 10 years, in exchange for access to IBM’s intellectual property. IBM will take a third-quarter pretax charge of $4.7 billion.

After months of on-again, off-again talks, IBM Chief Executive Officer Ginni Rometty struck a deal to jettison what has been a drag on earnings. Globalfoundries, owned by an investment arm of the government of Abu Dhabi, is taking on the unit to tap the expertise of its engineers in the fundamentals of semiconductor design and manufacturing.

“IBM has always taken the long view of its business strategy, continuously reinventing,” Tom Rosamilia, IBM’s senior vice president of the systems and technology group and integrated supply chain, said in a blog post today, calling the deal “one more step in the company’s reinvention.”

The cash portion paid to Globalfoundries will be partially offset by $200 million of working capital. IBM’s third-quarter charge will account for the cash payment and a $2.4 billion non-cash writedown on the business.

Retaining Jobs

Globalfoundries will acquire and operate manufacturing facilities in East Fishkill, New York, and Essex Junction, Vermont, and also add IBM’s commercial microelectronics business. The company said it plans to provide jobs for all IBM employees, aside from a group that will remain with IBM.

The 10-year partnership and exchange of thousand of patents will allow Globalfoundries to access key chipmaking technology and guarantee supply of chips that IBM needs for its systems, like mainframe computers and its Watson data-analytics technology.

“While IBM has world-class technology and intellectual property, the company has lacked scale,” IBM said in a regulatory filing today. “As a subscale business, IBM’s microelectronic business has been generating losses.”

The business will be classified as discontinued operations, which had a pretax loss of $400 million in the first half of this year and $700 million in 2013, IBM said in the filing.

The companies are aiming to complete the deal in 2015, pending regulatory approvals.

Earnings Announcement

IBM is moving up its third-quarter earnings report to 7 a.m. New York time, instead of after U.S. markets close. The company will host conference calls at 8 a.m. to discuss earnings and at 10 a.m. to talk about the deal.

Analysts expect IBM to report that third-quarter earnings, excluding some items, rose to $4.32 a share, according to estimates compiled by Bloomberg. That’s with revenue projected to fall for a 10th straight quarter, according to the average of analysts’ estimates.

The results are important as Rometty tries to reach a target of $18 a share in adjusted earnings this year, even as the company tries to keep up with a shift across the industry to cloud computing. It’s all part of a five-year plan to bolster profit by 2015.

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 Armonk, New York-based IBM with less of a role in the chip industry.

Technology Alliance

Manufacturing microelectronics accounts for less than 2 percent of IBM’s revenue.

The company is already part of an alliance with Globalfoundries, created in a spinoff of Advanced Micro Devices Inc.’s production facilities in 2009, to develop chip-production technology.

IBM had been seeking a buyer for its chipmaking division since at least 2013, a person with knowledge of the unit said in February. Earlier this year, the company was focused on finding a joint-venture partner after failing to attract an acquirer, two people familiar with the matter said at the time.

Then, IBM was willing to pay $1 billion to persuade Globalfoundries to take the unit, a person familiar with the process said in August, underscoring the urgency for Rometty to get the division off the books. That was too low for Globalfoundries, which wanted about $2 billion to offset the unit’s losses, the person said.

Intellectual Property

Throughout the talks, Globalfoundries has been primarily interested in acquiring IBM’s engineers and intellectual property, rather than the manufacturing facilities, people with knowledge of the matter said in June. As the industry pushes the limits of material science in producing devices that have some dimensions as small as one atom thick, that know-how is becoming more important.

Globalfoundries will gain IBM’s manufacturing-related intellectual property, according to the filing. IBM will retain its systems-related IP, and its licensing income will decline over time.

Even as IBM sought to exit the chip manufacturing business, the company is still investing in semiconductors. IBM wanted to maintain control of the design and intellectual property of the chips it uses, a person familiar with the matter said in February. The company plans to spend $3 billion on semiconductor research and development in the next five years.

IBM’s shares had fallen 2.9 percent this year through last week, compared with a 1.2 percent dip in the Dow Jones Industrial Average.

(Updates with executive’s comment in fourth paragraph.)
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