IBM 2014 Annual Report Download - page 101

Notes to Consolidated Financial Statements
International Business Machines Corporation and Subsidiary Companies
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The companies have also agreed to a 10-year exclusive manu-
facturing sourcing agreement in which GLOBALFOUNDRIES will
provide server processor semiconductor technology for use in
IBM Systems. The agreement provides the company with capac -
ity and market-based pricing for current semiconductor nodes
in production and progression to nodes in the future for both
development and production needs. As part of the transaction
agreement, the company will provide GLOBALFOUNDRIES with
certain transition services, including IT, supply chain, packaging
and test services and lab services. The initial term for these tran-
sition services is one to three years, with GLOBALFOUNDRIES
having the ability to renew.
The transaction will be completed as soon as is practical,
subject to the satisfaction of regulatory requirements, customary
closing conditions and any other required approvals. The transac-
tion is expected to close in 2015.
In the third quarter of 2014, the company recorded a pre-tax
charge of $4.7 billion related to the expected sale of the Micro-
electronics disposal group, which was part of the Systems and
Technology reportable segment. The pre-tax charge reflected
the fair value less the estimated cost of selling the disposal group
including an impairment to the semiconductor long-lived assets
of $2.4 billion, $1.5 billion representing the cash consideration
expected to be transferred to GLOBALFOUNDRIES and $0.8 bil-
lion of other related costs. The asset impairment was reflected
in property, plant and equipment, net and the other estimated
costs of disposal were reflected in other accrued expenses and
liabilities and other liabilities in the Consolidated Statement of
Financial Position at September30, 2014. These estimates may
be adjusted, and the company may incur additional charges prior
to the closing of the transaction. All assets and liabilities of the
business are reported as held for sale at December31, 2014. The
cash consideration is expected to be transferred over three years
with $750 million transferred at the closing date. The actual net
cash related to the transaction will be adjusted by the amount of
the working capital due from GLOBALFOUNDRIES, estimated to
be $200 million.
Reporting the related assets and liabilities initially as held for
sale at September30, 2014 was based on meeting all of the criteria
for such reporting in the applicable accounting guidance. While
the company met certain criteria for held for sale reporting in prior
periods, it did not meet all of the criteria until September30, 2014.
In addition, at September30, 2014, the company concluded that
the Microelectronics business met the criteria for discontinued
operations reporting. The disposal group constitutes a compo-
nent under accounting guidance. The continuing cash inflows
and outflows with the discontinued component are related to the
manufacturing sourcing arrangement and the transition, packag-
ing and test services. These cash flows are not direct cash flows
as they are not significant and the company will have no significant
continuing involvement.
Each acquisition further complemented and enhanced the com-
pany’s portfolio of product and services offerings. Green Hat helps
customers improve the quality of software applications by enabling
developers to use cloud computing technologies to conduct test-
ing of a software application prior to its delivery. Emptoris expands
the company’s cloud-based analytics offerings that provide supply
chain intelligence leading to better inventory management and
cost efficiencies. Worklight delivers mobile application manage-
ment capabilities to clients across a wide range of industries. The
acquisition enhanced the company’s comprehensive mobile port-
folio, which is designed to help global corporations leverage the
proliferation of all mobile devices—from laptops and smartphones
to tablets. DemandTec delivers cloud-based analytics software to
help organizations improve their price, promotion and product mix
within the broad context of enterprise commerce. Varicent’s soft-
ware automates and analyzes data across sales, finance, human
resources and IT departments to uncover trends and optimize
sales performance and operations. Vivisimo software automates
the discovery of big data, regardless of its format or where it
resides, providing decision makers with a view of key business
information necessary to drive new initiatives. Tealeaf provides a
full suite of customer experience management software, which
analyzes interactions on websites and mobile devices. Butterfly
offers storage planning software and storage migration tools, help-
ing companies save storage space, operational time, IT budget
and power consumption. Platform Computing’s focused technical
and distributed computing management software helps clients
create, integrate and manage shared computing environments
that are used in compute-and-data intensive applications such as
simulations, computer modeling and analytics. TMS designs and
sells high-performance solid state storage solutions.
For the “Other Acquisitions,” the overall weighted-average
life of the identified amortizable intangible assets acquired is
6.6years. These identified intangible assets will be amortized on
a straight-line basis over their useful lives. Goodwill of $1,880 mil-
lion was assigned to the Software ($1,412 million), Global Business
Services (GBS) ($5 million), GTS ($21 million) and STG ($443 mil-
lion) segments. As of the acquisition dates, it was expected that
approximately 15percent of the goodwill would be deductible for
tax purposes.
Divestitures
2014
Microelectronics—On October20, 2014, IBM and GLOBAL-
FOUNDRIES announced a definitive agreement in which
GLOBALFOUNDRIES will acquire the company’s Microelectronics
business, including existing semiconductor manufacturing assets
and operations in East Fishkill, New York and Essex Junction,
Vermont. The commercial OEM business to be acquired by GLO-
BALFOUNDRIES includes custom logic and specialty foundry,
manufacturing and related operations.