IBM 'major announcement' points to deal on chip manufacturing

IBM issues media advisory, raising the possibility that it has struck a deal with GlobalFoundries

Under pressure to boost margins, IBM is set to make what it calls a "major business announcement" Monday morning, raising the possibility that it has finalized a deal to transfer chip-making operations to GlobalFoundries.

IBM announced Sunday that it would be issuing its quarterly earnings statement early Monday, moving it up from its previous schedule, timed for after the close of markets. The company said it would also separately make a business announcement.

IBM CEO Ginni Rometty is looking for ways to increase margins as revenue growth slows while it transitions to new technology and services offerings. One way to do this is to shed less profitable parts of the business. The company's chip manufacturing operations in East Fishkill, New York, is one of them.

Reports surfaced this summer that IBM was working on a deal to have GlobalFoundries take over the plant. The deal fell though at the time, however, over disagreement on the amount of money IBM would pay GlobalFoundries to take over the money-losing fab, reports said. IBM was offering $1 billion, but GlobalFoundries wanted $2 billion, according to a Bloomberg report.

IBM has been steadily shedding its hardware assets and is closer to taking on a chip licensing model approach much like ARM Holdings. IBM earlier this month closed a deal to sell its x86 server business to Lenovo for $2.1 billion. Its hardware business now centers around Power architecture, which is best known for powering the Watson supercomputer, which outwitted humans in the TV game show "Jeopardy."

For decades, IBM made Power servers in-house, but is now working with other hardware makers to bring the chip architecture to more servers. IBM last year started licensing Power architecture so third-party companies can develop chips, servers and components. It also formed the OpenPower Foundation -- which boasts Samsung, Google, Tyan and Nvidia as members -- to promote Power-based software and hardware development.

If the deal with GlobalFoundries goes through, IBM will likely move the manufacturing of its Power chips into the hands of the Santa Clara, California, company. GlobalFoundries has many factories worldwide including, one in Malta, New York. IBM would also further reduce the size of the company's Systems and Technology Group, which is responsible for hardware.

In recent years, STG employees have been laid off, put on furlough and most recently, some have been moved to Lenovo as part of the x86 server deal.

IBM's second-quarter revenue was $24.4 billion, down 2 percent compared with $24.9 billion in the second quarter of 2013. Despite sluggish revenue, the company did make headway in increasing profit, which was up 28 percent year over year, to $4.1 billion. However, much of that bump was due to the comparison with a weak year-earlier quarter, which was abnormally low due to a billion-dollar charge the company took for workforce rebalancing.

During the conference call for its second quarter earnings, IBM executives described the company as being in transition, and cautioned that its revenue growth might flatten as it moves to new technologies and services.

Rometty highlighted cloud, big data and analytics, security and mobile technology as key to the company's growth.

Revenue from IBM's Systems and Technology hardware segment for the second quarter, meanwhile, was $3.3 billion, down 11 percent from the second quarter in 2013. The East Fishkill plant operates under the Systems and Technology Group.

IBM said it would release its earnings press release at 7 a.m. ET Monday, and issue details about the business announcement separately. An earnings conference call is scheduled for 8 am ET

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Marc Ferranti and Agam Shah

IDG News Service
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