Normally, when businesses talk about getting rid of a division, it usually follows that someone else is going to pay a tidy sum to take it over. But recently, an unexpected change happened as IBM (News - Alert) agreed to pay Globalfoundries $1.5 billion to have Globalfoundries take over its semiconductor operations. While the payments will arrive over the course of the next few years, the agreement actually opens up some new opportunities for IBM.
The deal calls for IBM to pay Globalfoundries the $1.5 billion over the course of a three year period, and Globalfoundries will become the exclusive technology provider in 22 nanometer, 14 nanometer and 10 nanometer semiconductors for the next ten years. Globalfoundries gets not only the commercial semiconductor technology business, but also the commercial microelectronics business, the intellectual property—including access to thousands of patents—and the technologies that were also a part of IBM Microelectronics, along with manufacturing operations and plants in both Essex Junction, Vermont, and East Fishkill, New York. The transaction itself, meanwhile, is expected to close next year.
According to IBM's director of research, John E. Kelly IIII, offering up the semiconductor operations will allow IBM to engage in faster growth, while also allowing it to both invest in and expand the research being done in chips already. This may well have been better news than expected as IBM as a whole not only fell short of expectations from Wall Street but also saw a four percent drop in revenue, which in turn prompted a seven percent drop in share price at the beginning of trading. While there has been a gain in share price with the rest of the trading day, it's still substantially off its previous close as of this writing.
It's strange to see a company pay another to take a line of business off its hands, but by like token it makes a certain amount of sense. After all, IBM has been engaging in quite a bit of change of late, and that can mean a lot of things. But with this deal, IBM allows someone else to handle the heavy lifting of actually building the processors, while IBM can focus on advancing its research in several areas, including cloud and mobile-based systems, big data issues, and even secure transaction-optimized systems, areas of development that have a great potential upside in the near-term. With IBM getting out of hardware, it can focus on working on things like Watson, which has proven to have quite a bit of potential for the company as it works in several different fields. That kind of effectiveness is hard to pass up, even for IBM, so getting rid of a hardware division—even if it had to pay a price in order to do so—isn't exactly out of line.
It may sound counter-intuitive, but IBM may well have won itself a major new victory in the near term, a victory that it could certainly use in the face of steadily growing competition in the field and a rapidly changing market environment. The move from desktops and laptops to mobile devices is just one of these major changes that IBM must work around, and with moves like these in the works, it may well come out better than some had expected.