Double Whammy: IBM Sheds Chip Unit As Financial Woes Hit Hard

IBM Monday said it will pay Globalfoundries $1.5 billion to take its money-losing chip unit off its hands as part of its push to shed unprofitable lines of business as it grapples with serious financial woes.

As part of the proposed deal, Globalfoundries agreed to supply IBM processors, which include the company's Power chips, for the next 10 years. The deal follows months of speculation that IBM was shopping around its chip-making business, which reportedly loses as much as $1.5 billion a year.

The deal was revealed just before IBM reported disappointing results for the third quarter, with sales falling 4 percent year over year to $22.4 billion. IBM also backtracked on its five-year profit goal of hitting $20 a share by 2015. IBM shares dropped 7 percent, or $13.16, to $169 on the news.

Related: IBM Partners Bullish On Possible Sale Of Power Chip Business

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"We are disappointed in our performance," IBM CEO Ginni Rometty said in a prepared statement. ’We saw a marked slowdown in September in client buying behavior, and our results also point to the unprecedented pace of change in our industry."

IBM, Armonk, N.Y., said the sale of its chip-making business will allow it to focus on more lucrative cloud, big data, analytics and software opportunities.

Channel partners have said IBM's struggling Power processor business needed a boost and that selling its chip manufacturing business was the best option to drive down pricing on the expensive chips and attract new customers to the Power platform. They have said the company's Power processor needs a lifeline as the latest Intel Xeon processor and emerging server threats from ARM pose serious challenges to the Power server platform.

NEXT: One More Step In IBM's 'Reinvention'

"Today's announcement that Globalfoundries plans to acquire IBM's global commercial semiconductor technology business is one more step in the company’s reinvention," said Tom Rosamilia, senior vice president, IBM Systems and Technology Group and Integrated Supply Chain, in a written statement.

That reinvention has included selling off low-margin parts of its business, including the sale of its x86 server and PC business to Lenovo for $2.3 billion. Reliance on Globalfoundries, Rosamilia said, will allow the chip maker to "innovate through high-volume semiconductor manufacturing, which is enhanced by economies of scale."

Patrick Moorhead, president and principal analyst at Moor Insights and Strategy, told CRN in August when discussing the potential of such a move that the company should "shed anything that isn't core to IBM's business moving forward. Most chip makers are fabless these days. That would help IBM keep costs down.

IBM's Power business has been struggling. Its market share, according to analysts, has slowly been dwindling as the industry has made sweeping changes to server architecture embracing AMD, ASIC, ARM, and, of course, Intel’s x86 architecture.

Chris Pyle, president of Boca Raton, Fla.-based Champion Solutions Group, told CRN in August, "I'm not sure it would make a bit of difference if IBM didn't make its own chips."

"IBM sold off its disk drive storage business years ago," Pyle said. "Did that stop me from selling hundreds of millions of dollars of storage devices with an IBM logo on it? No. Not one customer asked me, 'Hey, who actually manufactured what’s inside here?' "

Pyle said he is seeing IBM come under intense competition from x86 competitors such as AMD and Intel, which have been wooing IBM Power customers to build server architecture on less expensive commodity x86 architecture.

Globalfoundries is a United Arab Emirates-owned company and the world's second-largest chip maker, with six fabs in Singapore, one in Germany, and with an additional $10 billion fab under construction in Malta, N.Y.

As part of the deal, Globalfoundries will acquire and operate existing IBM semiconductor manufacturing facilities in East Fishkill, N.Y., and Essex Junction, Vt. IBM said the deal would transfer the employment of just over 5,000 IBM employees that worked in its semiconductor manufacturing plants to Globalfoundries.

IBM is holding a press conference Monday 10 a.m. ET to discuss the sale and the third-quarter results.