IBM hit investors with a double dose of bad news recently, when the Armonk-based corporation missed earnings projections for the third quarter and announced it would pay $1.5 billion to get rid of an underperforming division that manufactures chips.
The sale of the chip-manufacturing division, which had been rumored to be in negotiations since early summer, will see IBM pay $1.5 billion over three years to GlobalFoundries to take over the underperforming business unit. GlobalFoundries, a California-based chip manufacturer owned by an Abu Dhabi sovereign wealth fund, will acquire and operate IBM”™s semiconductor plants in Essex Junction, Vt., and East Fishkill. The company in a press release said it “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.”
Earlier this year, Gov. Andrew Cuomo announced an agreement between IBM and SUNY Polytechnic”™s College of Nanoscale Science and Engineering to maintain 3,100 jobs in New York state, including those in its semiconductor plants and related fields in Dutchess County as well as in Albany and Yorktown Heights.
In a Feb. 24 press release announcing the deal, Dutchess County Executive Marcus Molinaro said, “As Dutchess County”™s largest private sector employer, IBM remains a vital component of our local, regional and state economy. Today”™s announcement is welcome news, and we appreciate the hard work and commitment by Governor Cuomo to bring this agreement to fruition, and we appreciate IBM”™s continued investment in Dutchess County.”
The $3 billion research partnership announced in July between IBM and SUNY Polytechnic will continue, and under the deal reached to acquire the IBM chip unit, GlobalFoundries is expected to get primary access to the research produced.
“This acquisition solidifies GlobalFoundries”™ leadership position in semiconductor technology development and manufacturing,” said Sanjay Jha, CEO of GlobalFoundries, in the press release announcing the deal. “We can now offer our customers a broader range of differentiated leading-edge 3D transistor and RF technologies, and we will also improve our design ecosystem to accelerate time-to-revenue for our customers. This acquisition further strengthens advanced manufacturing in the United States, and builds on established relationships in New York and Vermont.”
IBM will reflect a pretax charge of $4.7 billion in its financial results for the third quarter, which includes an asset impairment, the estimated costs to sell the IBM microelectronics business and the $1.5 billion to be paid to GlobalFoundries over the next three years.
“This acquisition enables IBM to focus on fundamental semiconductor and material science research, development capabilities and expertise in high-value systems, with GlobalFoundries”™ leadership in advanced technology manufacturing at scale and commitment to delivering future semiconductor technologies,” said John E. Kelly III, IBM senior vice president and director of research. “We are grateful for the leadership and investments by the states of New York and Vermont in supporting the semiconductor industry.”
In January, IBM announced the sale of a segment of its server business to Lenovo for $2.3 billion, a transaction that is in the process of closing, according to recent Securities and Exchange Commission filings. GlobalFoundries”™ acquisition of IBM”™s chip manufacturing division remains subject to regulatory approval.
On Oct. 20, the same day the division sale to GlobalFoundries was announced, IBM told investors that adjusted earnings per share for the third quarter were $3.68 on $22.9 billion in revenue, severely short of analysts”™ estimates. Zacks Investment Research pegged the average estimates at earnings of $4.30 per share on $23.45 billion in revenue. In addition, IBM dropped its stated goal of $20 in earnings per share in 2015. Shares of IBM opened at $166.93 on Oct. 20, an 8.3 percent drop from the closing price of $182.05 on the previous day of trading.
“We are disappointed in our performance,” said Ginni Rometty, IBM”™s president and CEO. “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. While we did not produce the results we expected to achieve, we again performed well in our strategic growth areas ”“ cloud, data and analytics, security, social and mobile ”“ where we continue to shift our business.”
