Why IBM exited from semiconductor business by paying $1.5 bn?

Enterprise IT vendor IBM has finally exited from semiconductor technology business.

There are several key reasons for IBM’s exit from semiconductor technology business.

First, semiconductor technology business is a loss making business for IBM. The net loss during the third quarter was $3.4 billion.

The divestment of semiconductor business means IBM made a net income of $18 million or $0.02 of diluted earnings per share, which includes a net loss from discontinued operations of $3.4 billion, or $3.44 per diluted common share for the third-quarter of 2014.

Second, GLOBALFOUNDRIES will become IBM’s exclusive server processor semiconductor technology provider for 22 nanometer (nm), 14nm and 10nm semiconductors for the next 10 years.

Interestingly, IBM will pay $1.5 billion as cash consideration to GLOBALFOUNDRIES over the next three years and will be adjusted by the amount of the working capital due by GLOBALFOUNDRIES to IBM, estimated to be $0.2 billion.

Third, the deal enables IBM to focus on fundamental semiconductor research and the development of future cloud, mobile, big data analytics, and secure transaction-optimized systems.

IBM continues its previously announced $3 billion investment over five years for semiconductor technology research to lead in the next generation of computing.

IBM China

Fourth, IBM is utilizing its intellectual property that will be offered to GLOBALFOUNDRIE as part of this agreement.

Fifth, IBM technology team on semiconductor business will be absorbed by GLOBALFOUNDRIES.

Sixth, the acquisition opens up business opportunities in industry-leading radio frequency (RF) and specialty technologies and ASIC design capabilities.

GLOBALFOUNDRIES has a capital expenditure plan of approximately $10 billion in 2014-2015, with the majority being invested in New York. GLOBALFOUNDRIES has created nearly 3,000 direct jobs in New York and thousands more indirect jobs in the United States since 2009.

GLOBALFOUNDRIES will acquire and operate existing IBM semiconductor manufacturing operations and facilities in East Fishkill, New York and Essex Junction, Vermont, adding capacity to serve its customers and thousands of jobs to GLOBALFOUNDRIES’ workforce.

GLOBALFOUNDRIES plans to provide employment opportunities for substantially all IBM employees at the two facilities who are part of the transferred businesses, except for a team of semiconductor server group employees who will remain with IBM.

GLOBALFOUNDRIES will also acquire IBM’s commercial microelectronics business, which includes ASIC and specialty foundry, manufacturing and related operations and sales.  GLOBALFOUNDRIES plans to invest to grow these businesses.

IBM will reflect a pre-tax charge of $4.7 billion in its financial results for the third quarter of 2014, which includes an asset impairment, estimated costs to sell the IBM microelectronics business, and cash consideration to GLOBALFOUNDRIES.

Baburajan K
[email protected]