IBM to selloff its unprofitable chip-manufacturing unit for $1.5 billion

IBM has said it it will be making a “major business announcement” on Monday morning, indicating that the computer giant has finally finalized a deal with GlobalFoundries to transfer its chip-making operations.

According to Bloomberg, IBM has agreed to pay Globalfoundries Inc. $1.5 billion for the California based company to take over its unprofitable chip-manufacturing unit.

IBM has been subject to increasing pressure to boost margins. On Monday morning IBM will be issuing its quarterly earnings statement, ahead of its previous schedule – at after trading hours. It also said that it will be making a separate business announcement – when it is expected to announce the deal.

Revenue growth for the company has been declining and as a result CEO Ginni Rometty is looking for ways to increase margins. A very viable option would be to separate business segments that are the least profitable and its chip manufacturing division is one of them.

Rumors spread in the summer that IBM had been in talks to have GlobalFoundries take over the plant, located in East Fishkill, New York. However, a deal never actually went through because of disagreements on how much IBM would pay GlobalFoundries to take over operations at the plant.

According to a Bloomberg report, IBM offered $1 billion, but GlobalFoundries was asking for $2 billion.

IBM has shed off its hardware assets and it appears to be adopting a chip licensing model similar to that of ARM Holdings. The company sold its x86 server business to Lenovo for $2.1 billion earlier this month.

For many years the company made Power servers in-house, however it is now working with other makers to bring the chip architecture to a wider range of servers.

Last year it began licensing Power architecture so that third-party companies could develop servers, chips and components.

IBM also created the OpenPower Foundation to encourage Power-based software and hardware development, with Samsung, Nvidia, and Google among its members.

IBM reported second quarter revenue of $24.4 billion, 2 percent lower than $24.9 billion in the same period the year before. Although revenue was somewhat lackluster, IBM did report better profit of $4.1 billion, up 28 percent year-over-year.

In the second quarter earning conference call IBM said that the company is in transition, moving to new technologies and services, highlighting cloud, big data and analytics, security and mobile technology as the future of the company.

IBM will be releasing its earnings press release at 7 a.m. ET Monday, and provide details about the business announcement separately. An earnings conference call is going to be held at 8 am ET.

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