IBM to pay Globalfoundries $1.5 billion to take chip unit

(Reuters) - IBM Corp IBM.N said it would hive off its loss-making semiconductor unit to contract-chipmaker Globalfoundries Inc to focus on cloud computing and big data analytics.

A man passes by an illuminated IBM logo at the CeBIT computer fair in Hanover February 27, 2011. REUTERS/Tobias Schwarz

IBM will pay Globalfoundries $1.5 billion in cash over the next three years to take the chip operations off its hands, the companies said in a statement on Monday.

IBM took a related pre-tax charge of $4.7 billion in its third quarter. It also reported a 4 percent drop in revenue on Monday, hurt by weak sales in its software and services businesses.

IBM’s shares fell 8 percent to $167 in premarket trading.

“They need to narrow their focus, get their A-game on, and any distractions from a core business perspective, such as this deal, need to be put in the rear-view mirror,” FBR Capital Markets analyst Daniel Ives told Reuters.

“From an IBM and investor perspective, it takes one troubled area out of the core franchise.”

IBM has been reducing its presence in the hardware industry. The company completed its $2.1 billion sale of the x86 server business to Lenovo Group Ltd 0992.HK earlier this month.

In 2005, Lenovo acquired IBM’s consumer PC laptop business for $1.25 billion.

The business being sold focuses on chip design and manufacturing and is housed in the company’s systems and technology unit, which accounted for about 11 percent of total sales in the third quarter.

Silicon Valley-based Globalfoundries said it would take over IBM’s manufacturing operations in East Fishkill, New York and Essex Junction, Vermont, and offer jobs to substantially all IBM employees affected by the deal.

Globalfoundries Chief Executive Sanjay Jha said the company would invest $10 billion between 2014 and 2015 to develop 10 nanometer, 14 nanometer and radio-frequency technologies.

“As (IBM’s) assets become part of Globalfoundries, they will benefit from the scale,” Jha, the former CEO of Motorola Mobility, told Reuters.

Globalfoundries is owned by the Mubadala Development Co, the Abu Dhabi government’s investment fund.

The deal is expected close in 2015.

Additional reporting by Shivam Srivastava in Bangalore; Editing by Gopakumar Warrier and Saumyadeb Chakrabarty