IBM Stock Plummets as Company Abandons Chip Business

IBM CEO Ginni Rometty. Image: IBM

IBM’s stock price is on the decline, after the company agreed to pay Globalfoundries $1.5 billion to take on its ailing chipmaking business and abandoned its controversial “2015 Roadmap” to deliver $20 earnings per share by next year.

News of the Global Foundries deal arrived on Sunday, via Bloomberg, and IBM CEO Ginni Rommety confirmed the agreement during the company’s financial earning call on Monday morning, when she also deep-sixed the 2015 Roadmap. The company’s stock price is down 7 percent on the day.

The sale of the chip business is part of IBM’s longer term shift away from hardware towards higher margin businesses, and in the age of cloud computing—where businesses can do easily rent computing power over the internet without buying their own hardware—many other hardware giants have been following IBM’s lead. Earlier this month, HP announced plans to split into two separate companies, one for its desktop PC line and one for its cloud computing and enterprise software business. And last year, Dell went private last year to focus on transforming itself into a cloud and software company, while storage giant EMC spun-off its cloud computing and big data units into a new company called Pivotal.

IBM started down this path more than a decade ago when it acquired consulting company PricewaterhouseCoopers in 2002 and sold its desktop computing line to Chinese company Legend, now known as Lenovo, in 2005. But while IBM beat Dell and HP to party by several years, it has continued to struggle with its own transformation.

As reported by Bloomberg, IBM has sought a buyer for its chip business since at least last year. But the unit, which loses $1.5 billion a year, was a tough sell. The company could simply have shuttered the business, but it still depends on its chips to power its high-end mainframe line—one of the only hardware businesses IBM still retains. The company was ultimately forced to pay Globalfoundries, a former division of chipmaker AMD, to take it over.

That’s just one of many reasons that IBM wasn’t able to keep to the 2015 Roadmap promise, first made by former IBM CEO Sam Palmisano in 2010. To reach that goal, IBM has worked to transform itself into not just a consulting company, but a also provider of cloud services to rival the likes of Google and Amazon. To that end, IBM acquired cloud computing provider SoftLayer last year, and invested $1 billion into its Watson brand of analytics services.

But those initiatives have come too late to transform IBM into a cloud powerhouse in time to deliver on the 2015 roadmap, so the company has spent much of the year trying to find other ways to improve margins — most notably through a series of brutal layoffs. None of that was enough to reach its goals. Although IBM had abandoned the 2015 Roadmap, given the dumping of the chip division and the confirmation of yet another round of layoffs, it appears that IBM’s cost-cutting will be as ruthless as ever.

On brighter note, Rometty confirmed that cloud revenues are up. But, as Bloomberg points out, the company only expects cloud revenues of $3.1 billion this year, a small fraction of IBM’s $100 billion total revenue last year.