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IBM Paying Globalfoundries $1.5 Billion to Take Unit in Retreat From Chips

International Business Machines Corp. (IBM) agreed to pay Globalfoundries Inc. $1.5 billion to take an unprofitable chip-manufacturing unit off its hands, according to two people with knowledge of the matter.

IBM will also receive $200 million worth of assets, making the net value of the deal $1.3 billion, said the people who asked not to be identified because the agreement is private. The companies plan to announce the deal today, the people said. IBM put out a statement yesterday saying it planned to make a “major business announcement” today.

After months of on-again, off-again talks, IBM Chief Executive Officer Ginni Rometty finally struck a deal to jettison the chipmaking unit, which 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.

In a 10-year partnership, Globalfoundries will supply IBM with Power processors in exchange for access to IBM’s intellectual property, the people said. That would 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.

Photographer: Drew Angerer/Bloomberg

After months of on-again, off-again talks, IBM Chief Executive Officer Ginni Rometty... Read More

IBM will pay Globalfoundries the $1.5 billion over three years, the people said.

Globalfoundries spokesman Kevin Kimball declined to comment. James Sciales, a spokesman for IBM, didn’t return a phone call or e-mail requesting comment.

Earnings Announcement

In yesterday’s statement, IBM also said it planned to announce third-quarter results today at 7 a.m. New York time, instead of after U.S. markets close as planned. The company will host a conference call at 8 a.m.

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.

Photographer: Scott Eells/Bloomberg

Watson researchers work inside IBM's Thomas J. Watson Research Center in Yorktown... Read More

Deal Talks

Manufacturing microelectronics accounts for less than 2 percent of IBM’s revenue. Meanwhile, the division loses as much as $1.5 billion a year, a person familiar with the matter said in June.

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.

Even as IBM wants to exit the chip manufacturing business, the company is still investing in semiconductors. 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. 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.