International Business Machines (IBM) is abandoning its semiconductor manufacturing operations and has agreed to pay a company to take the unprofitable business off Big Blue's shoulders.
IBM is reportedly heaving off its chip operations to GlobalFoundries, a maker of semiconductors owned by the investment arm of the government of Abu Dhabi, and it is paying the company $1.5 billion to cart off IBM's chip-making business. This is according to a new report published by Bloomberg citing two people who claimed to be familiar with the matter. On Sunday, IBM released an advisory saying it would make a "major business announcement" on Monday along with the company's third-quarter results.
If the report is true, this signifies IBM's acknowledgment that making its specialized chips for its own products, such as its mainframe computers and Watson-based solutions, is proving too burdensome for the company to continue. IBM is a pioneer in the semiconductor industry, with its line of chips such as the PowerPC used for all sorts of devices including personal computers and video game consoles. However, the rise of other chip manufacturers, particularly Intel, has caused IBM's chip business to lag behind.
The report says IBM will pay GlobalFoundries in installments over a period of three years. IBM will also receive assets worth of $200 million, pegging the deal's total net worth at $1.3 billion. The agreement also covers a 10-year partnership that requires GlobalFoundries to supply processors to Big Blue in exchange for access to important semiconductor technology protected by intellectual property law. GlobalFoundries is also reportedly interested in tapping the expertise of IBM's engineers.
"You would think that IBM would have gotten cash for it, not the other way around," says analyst G. Dan Hutcheson at VLSI Research.
Hutcheson believes that the $1.5 billion payment could be used to cover the expenses of operating IBM's semiconductor facilities to manufacture the special chips needed for IBM's products.
Previous reports say IBM has long been looking to sell off its semiconductor facilities, with the list of potential buyers including Intel, Taiwan Semiconductor Manufacturing and GlobalFoundries. The sources say IBM was reportedly asking to receive $2 billion, but bidders were only willing to offer $1 billion.
Shares had fallen 2.9 percent throughout this year, and IBM expects to report $4.32 per share, excluding some items, at its earnings call on Monday. Analysts estimate IBM's revenue to be on a decline for the tenth straight quarter.
