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IBM: Paying $1.5 Billion to Ditch Chip Business

IBMIn what many are considering an odd move, rather than GlobalFoundries paying International Business Machine (IBM) for its operation, IBM is paying them $1.5 billion to ditch its chip-making business.

In a joint announcement, IBM’s semiconductor manufacturing operations will be handed over to GlobalFoundries to the tune of $1.5 billion, all in cash to be paid out over a three-year period. However, it is IBM who will shell out the money, not the other way around.

Shedding a little light on the unusual decision, IBM reported in an investor statement that in addition to the company’s semiconductor business lacking scale, it has been generating losses. IBM also stated that with increasing sophistication in the development of semiconductors, additional costs could accumulate quickly. Therefore, by ditching this segment of the business now, IBM will have the opportunity to free up capital and reallocate it elsewhere.

Reported in second quarter earnings, IBM’s microelectronics business experienced an 18% decline in revenue from the same time one year prior. Included in the deal, intellectual property will be handed over by IBM but also, the new owner and operator of the company’s existing semiconductor manufacturing plants will be GlobalFoundries.

In 2009, GlobalFoundries was created as a result of Advanced Micro Devices selling its manufacturing operations to Advanced Technology Investment Company, wholly owned by Abu Dhabi’s government and part of the United Arab Emirates.

In the midst of this unique transaction, Sanjay Jha, chief executive of GlobalFoundries confirmed that there are no expected layoffs or shutdowns at IBMs semiconductor factories in Vermont and New York’s Hudson Valley. In fact, Jha said that roughly 5,000 IBM employees will be welcomed, which includes about 800 of the world’s best technologists.

Just recently, GlobalFoundries constructed a large manufacturing facility in upstate New York, just outside of Albany. Because of the deal with IBM, GlobalFoundries will take the number two spot as producer of computer chips worldwide and as such, it plans to invest approximately $10 million over the next two years for growth, specifically in New York. In addition, the company plans to provide chips to IBM for the next 10 years.

According to Senior Vice President of IBM, John Kelly, job commitments in New York will be upheld and the company wants to now focus on larger computer systems, as well as research.

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