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Why IBM’s System and Technology Division Went Through an Overhaul

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IBM divested its system x and microelectronics operations

As mentioned in the earlier part of the series, IBM’s (IBM) system and technology division is the segment that has suffered the most decline in 4Q14. In 2014, IBM sold its x86 server division to Lenovo for $2.1 billion. IBM was earlier considered a market leader in x86-based servers. However, it lost its title after it sold its server business to Lenovo.

To gain diversified exposure to IBM, you can invest in the Technology SPDR ETF (XLK). XLK invests 3.51% of its holdings in IBM. The above presentation shows the market share of players in the server space. HP (HPQ) leads this space with a share of ~26%. Oracle (ORCL) is another leading player in this space whose x86 servers are compatible with Oracle Solaris, Oracle Linux, and Microsoft Windows (MSFT).

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In late 2014, IBM announced the transfer of its semiconductor manufacturing operations that is entrusted with the making of its POWER processors to Globalfoundries. After this transfer, Globalfoundries will act as a foundry for IBM under a ten-year supply agreement for POWER and other devices. Although IBM has stated this transaction as a sale, IBM agreed to pay Globalfoundries $1.5 billion over the next three years to get rid of its semiconductor operations. This deal enabled IBM to remove loss-generating semiconductor operations from its books.

Under this deal, Globalfoundries will be IBM’s exclusive server processor semiconductor technology provider for 22-nanometer (or nm), 14-nm, and 10-nm semiconductors for the next ten years. Related patents have also been transferred as a part of this deal.

As a part of its transition and focus on higher margin software space, IBM systematically divested its units within the hardware business. The company has announced layoffs and has realigned its workforce to keep control of its costs.

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