IBM Close to Globalfoundaries Deal to Sell Chip Business

IBM (IBM) reportedly is close to finalizing a deal with Globalfoundaries to sell off its chip-making business, according to sources cited in a Bloomberg report.

The deal has been expected in some corners. Word surfaced in April that Globalfoundaries had moved ahead of Intel (INTC) and Taiwan Semiconductor Manufacturing (TSM) as the leading contender to buy IBM’s chip business even though talks reportedly has been snagged by a hefty $2 billion price tag and intellectual property issues. That followed buzz of two months earlier that IBM had put its semiconductor business on the block and hired Goldman Sachs to manage the negotiations. The vendor subsequently backpedaled from a buyout, apparently preferring to find a partner instead that would enable it to hold on to its intellectual property portfolio.

But it’s IBM’s engineers and intellectual property rather than its manufacturing facilities that has retained Globalfoundries’ interest. Under terms of the proposed deal, Globalfoundaries, which operates a fabrication plant in New York and maintains a joint development project with IBM, will supply IBM with microprocessors, the Bloomberg report said. Globalfoundaries reportedly has no interest in IBM’s aging manufacturing facility. 

Specific details of the deal aren’t available at this time, including the status of IBM’s IP holdings.

IBM is struggling to overcome eight consecutive quarters of declining revenue while holding fast to its $20 a share 2015 earnings goal. A deal to divest of its chip business would follow a similar move earlier this year to sell its x86 server operation to Lenovo for $2.3 billion. That transaction is still waiting on regulatory approval.

According to Bloomberg’s sources, IBM’s chip-making unit loses as much as $1.5 billion a year. Investment house Sanford Bernstein estimates far different figures, pegging the unit’s sales at about $1.75 billion last year and its pre-tax losses at $130 million.

IBM’s semiconductor unit makes chips for the vendor’s Power lineup. At this point, IBM only has mainframe and high-end server manufacturing based on its own chips, leaving it to rely heavily on sales to outside customers to make ends meet with the semiconductor unit. Microelectronics manufacturing comprises but 2 percent of IBM’s $100 billion annual sales.

Much of IBM’s intellectual property is associated with semiconductor technology and its most powerful chips drive its advanced computing applications such as its much-promoted Watson supercomputer. Selling its semiconductor unit would cement IBM’s path away from hardware reliance and signal the vendor firmly had thrown in its lot with cloud services and software.