IBM to take over loss making chip unit from GlobalFoundries for $1.5 billion

IBM will spend $1.5 billion to take over Globalfoundries’ struggling chip making unit located in Santa Clara, California. This will help IBM avoid billions of dollars in capital spending it was facing to upgrade its manufacturing technology.

The deal with GlobalFoundries, which is owned by an Abu Dhabi sovereign wealth fund, is poised to be announced in the US early on Monday, according to a person familiar with the agreement.

IBM has been searching for someone to take on its chip manufacturing arm for much of the year but has been hampered by the small number of players left in the consolidating business, giving it little bargaining power.

The huge cost of upgrading equipment and manufacturing processes for each new generation of chips, which involves shrinking the elements in a semiconductor to ever-smaller sizes, has already forced others to quit.

IBM, which issued an advisory on Sunday saying that it would make a “major business announcement” on Monday, is expected to announce the deal along with its third-quarter results, Bloomberg reported, citing two people familiar with the matter.

According to the report, IBM’s CEO Ginni Rometty finally struck the deal with Globalfoundries after months of talks between the companies. The sources told Bloomberg that Globalfoundries will have access to IBM’s key chip making technology to produce and supply the Armonk, New York-based technology giant with Power processors for its systems, such as mainframe computers and its Watson data-analytics technology.

GlobalFoundries has emerged as the second biggest in the foundry business after Taiwan’s TSMC, making chips for other companies.

It was formed with the spin-off of AMD’s manufacturing arm in 2009 and expanded with the purchase of Chartered Semiconductor a year later.

IBM, which initially hoped to sell its chip unit for more than $2 billion, will pay Globalfoundries the $1.5 billion over a period of three years, Bloomberg reported.

IBM said earlier this month that it had mostly completed the sale of its commodity-server business to Lenovo for $2.1 billion, with up to 7,000 workers to be transferred to the Chinese company.

Both companies refused late on Sunday to comment on the news, which was first reported by Bloomberg.

IBM’s shares were up 1.23 percent on the New York Stock Exchange at Friday’s closing.