IBM chip deal secret for month

Malta

IBM's $1.5 billion deal to hand over its computer chip manufacturing to GlobalFoundries was hammered out exactly a month ago, according to a recent filing with federal regulators, although it wasn't announced until last week.

IBM had been shopping its microelectronics unit since at least 2013, although it wasn't until this summer that news reports began surfacing that IBM had started negotiating a deal with GlobalFoundries, which employs 3,000 people at its Fab 8 computer chip factory in Malta.

IBM says in its third quarter financial report — filed Tuesday with the U.S. Securities and Exchange Commission — that its microelectronics unit was effectively sold on Sept. 30.

That was two weeks after the semiconductor news web site SemiWiki reported that IBM had reached a handshake agreement with GlobalFoundries, although a subsequent story in the Poughkeepsie Journal said the two sides were scheduled to go to arbitration at the end of the month to "iron out the details."

For accounting purposes, a business unit can be considered to be sold (or "sale pending") once the two sides involved in the deal are certain that no significant changes will be made or that the deal will collapse, although the final sale contract doesn't actually have to be signed until later.

IBM and GlobalFoundries didn't announce the deal until Oct. 20. The two sides were prepared to make an announcement earlier than that, but several events forced the announcement to be pushed back, according to sources.

IBM did not return a call Wednesday seeking comment on the sale date, which allowed IBM to take a post-tax $3.3 billion accounting charge for the sale as part of its third-quarter earnings.

Although IBM has been earning roughly $300 million in revenue each quarter from its microchip business, which also included making chips for other companies, the unit had become a drain on earnings, losing the company $398 million in 2013 and $261 million during the first six months of 2014.

A GlobalFoundries spokesman declined comment because it was IBM's filing. Unlike IBM, GlobalFoundries' stock is privately held and not subject to the same regulatory reporting requirements.

IBM also provided additional details of the deal in Tuesday's filing, including the fact that it will pay GlobalFoundries half its $1.5 billion cash fee at the close of the sale, expected sometime early next year.

The rest — minus about $200 million in working capital that IBM is due — will be paid to GlobalFoundries over three years, or about $183 million annually.

Tuesday's filing also states that as part of the deal, IBM will provide GlobalFoundries with "transition services" that will include computer, lab, supply chain and manufacturing support for between one and three years, although GlobalFoundries could renew that agreement.

GlobalFoundries has a 10-year contract to provide IBM with server chips used in IBM's high-end computing systems, such as the Watson supercomputer that can understand human language. GlobalFoundries and IBM have collaborated on manufacturing such chips dating back to 2012.

lrulison@timesunion.com • 518-454-5504 • @larryrulison