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Why IBM sold its semiconductor division to Globalfoundries

Must-know: IBM Corp’s 3Q14 earnings review (Part 3 of 10)

(Continued from Part 2)

IBM announced the sale of its chip operations to Globalfoundries

In its 3Q14 results, IBM (IBM) announced the sale of its semiconductor operations to Globalfoundries. IBM would sell its manufacturing, foundries, sales, technology operations, and patent portfolio to Globalfoundries.

The company stated that the sale is aligned with its plan to focus on high growth areas like cloud computing and “big data.” IBM will pay Globalfoundries $1.5 billion over next three years. The deal is expected to close in 2015.

Globalfoundries is a contract chip manufacturing company. It’s owned by the Mubadala Development Co.—the Abu Dhabi government’s investment fund.

According to Globalfoundries’ CEO, Sanjay Jha, the company would invest ~$10 billion in 2014 and 2015 to develop ten nanometer (or nm) and 14nm and radio-frequency technologies.

If IBM posts good earnings in the future, it will benefit the NASDAQ Technology Dividend Index Fund (TDIV), the Dow Jones Industrial Average ETF (DIA), the iShares U.S. Technology ETF (IYW), and the Market Vectors Wide Moat Research ETF (MOAT). These exchange-traded funds (or ETFs) have high exposure to the company.

IBM will continue to design chips

Although, IBM sold its chip-making factories, it will continue to design high-end chips. It will also continue to sell servers and supercomputers. Instead of manufacturing “power chips” itself, IBM will buy the chips from Globalfoundries.

IBM will use the power chips for its own mainframe, “scale-out” systems, and next-generation storage systems. Power chips are solid state devices that convert heat directly into electricity. They have improved power generation and waste heat recovery techniques. Power chips are used in mobiles, TV, and cars.

Sale of chip business impacted IBM’s financials

IBM’s chip business contributed ~11% to its overall sales in the 3Q14. Selling the chip business to Globalfoundries includes a non-recurring pre-tax charge of $4.7 billion. The charge includes the payment of $1.5 billion, or $3.3 billion net of tax, in 3Q14. Due to this charge, IBM reported a massive decline in its earnings.

It had earnings per share (or EPS) of $0.02 in 3Q14—compared to $3.68 in 3Q13. For the nine months ending on September 30, 2014, EPS stood at $6.44—compared to $9.27 for the nine months ending September 30, 2013.

Continue to Part 4

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