IBM to pay Globalfoundries $1.5B to take chip business

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International Business Machines Corp. (NYSE:IBM) has decided to sell its unprofitable chip-making arm to  Globalfoundries. The tech firm has agreed to pay Globalfoundries $1.5 billion to take the money-losing unit off its hands.

Deal to help IBM ‘reinvent’

Per the statement made today by both the companies, IBM will be paying Globalfoundries the $1.5 bil cash over three years.

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

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Lately, the company has been under some pressure to increase its margin. CEO Ginni Rometty is trying to find  ways to increase the revenue of the company, which is declining along with the margins. Spinning off its loss-making arm is the most obvious and practical solution at this time for the company.

There were reports over the summer that IBM is holding discussions with Globalfoundries regarding acquiring the plant located in East Fishkill, New York. But the deal never materialized because of the disagreements over the payment to Globalfoundries. Bloomberg mentioned in its report that IBM was offering $1 billion whereas Globalfoundaries was demanding $2 billion.

IBM “disappointed” with earnings

Along with the announcement of the deal, IBM also reported quarterly earnings that came in below analysts’ expectations. For the quarter, the tech firm reported earnings of $3.68 a share on revenue of $22.40 billion against $4.31 a share on revenue of $23.37 billion expected by analysts.

“We are disappointed in our performance,” Ginni Rometty, IBM chairman, president and CEO said in a statement.

Today’s announcement makes it clear that IBM is following ARM Holdings into a chip licensing business model. Earlier this month, the tech firm sold its server business to Lenovo for $2.1 billion. IBM manufactured integrated Power servers for many years, but now it is working with various other makers to use the chip architecture in a wider range of servers. Just last year, the company started licensing the Power architecture to third parties to develop servers, chips and components. Additionally, the company also created the OpenPower Foundation to advance Power-based software and hardware development, with Samsung, Nvidia and Google among its members.

In pre-market trading Monday, IBM shares were down over 5% following the announcement.