It’s official: IBM to sell chip-making biz to GlobalFoundries

It’s true: IBM will pay GlobalFoundries $1.5 billion over three years to take over its commericial semiconductor manufacturing business and IBM will take a $4.7 billion cash charge for its third quarter as a result.

Under terms of the deal, first reported by Bloomberg, [company]GlobalFoundries[/company] will be IBM’s exclusive provider of server processors in the 22-nm and 10-nm semiconductors for 10 years. And the $1.5 billion cash consideration will be adjusted by an estimated $200 million depending on the amount of working capital involved, per an IBM statement.

In his initial take on the deal, Wells Fargo analyst Maynard Um was positive. In a research note, he wrote:

The potential sale of this business, in our opinion, is positive as despite our estimation of revenue generation of around $1.7B in 2013, we believe the segment was loss making.

The fact that [company]IBM[/company] was talking with GlobalFoundries about offloading its semiconductor fabrication business was among the industry’s worst-kept secrets. It also reportedly talked to [company]Intel[/company] and Taiwan Semiconductor Manufacturing Corp. about buying the business.

GlobalFoundries was launched five years ago as a joint venture by [company]AMD[/company] and the Advanced Technology Investment Company. In this deal, the two companies said GlobalFoundries will gain “substantial intellectual property including thousands of patents.” And they claim the acquisition will yield opportunities in radio frequency (RF) and specialty technologies and ASIC design capabilities.

While IBM is exiting the semiconductor manufacturing business, it will continue to design high-end chips, including one that mimics the structure and function of the human brain. But manufacturing chips is extremely expensive and IBM CEO Ginni Rometty has vowed to get the company out of money-losing businesses.

In IBM’s third-quarter earnings release, IBM said revenue from continuing operations was off 4 percent year over year, which illustrates IBM’s dilemma as it navigates from its old model to cloud and services. In a statement, Rometty said:

We are disappointed in our performance.  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.  We will accelerate this transformation.

IBM will talk more about this deal on its third quarter earnings call at 8 AM ET Monday, and again on another call at 10 AM ET.