Acquisitions/Divestitures:

9 Months Ended

Sep. 30, 2014

9. Acquisitions/Divestitures:

Acquisitions: During the nine months ended September 30, 2014, the company completed six acquisitions at an aggregate cost of $608 million.

The Software segment completed acquisitions of five privately held companies: in the first quarter, Aspera, Inc. (Aspera) and Cloudant, Inc. (Cloudant); in the second quarter, Silverpop Systems, Inc. (Silverpop) and Cognea Group Pty LTD (Cognea); and in the third quarter, CrossIdeas Srl. Global Technology Services (GTS) completed one acquisition: in the third quarter, Lighthouse Security Group, LLC (Lighthouse), a privately held company.

The following table reflects the purchase price related to these acquisitions and the resulting purchase price allocations as of September 30, 2014:

		Amortization			Total
(Dollars in millions)		Life (in yrs.)			Acquisitions
Current assets				$	56
Fixed assets/noncurrent assets					39
Intangible assets:
	Goodwill		N/A		445
	Completed technology		5-7		68
	Client relationships		7		77
	Patents/trademarks		1-7		18
Total assets acquired					705
Current liabilities					(26)
Noncurrent liabilities					(70)
Total liabilities assumed					(96)
Total purchase price				$	608

N/A - not applicable

Each acquisition further complemented and enhanced the company’s portfolio of product and services offerings. Aspera’s technology makes cloud computing faster, more predictable and more cost effective for big data transfers such as enterprise storage, sharing virtual images or accessing the cloud for increased computing capacity. Cloudant will extend the company’s mobile and cloud platform by enabling developers to easily and quickly create next generation mobile and web-based applications. Silverpop is a provider of cloud-based capabilities that deliver personalized customer engagements in highly scalable environments. Cognea offers personalized artificial intelligence capabilities designed to serve as an intuitive interface between human users and data-driven information. CrossIdeas delivers next generation identity and access governance capabilities to help mitigate access risks and segregation of duty violations. Lighthouse is a provider of cloud-enabled managed identity and access management solutions. Purchase price consideration for all acquisitions as reflected in the table above, is paid primarily in cash. All acquisitions are reported in the Consolidated Statement of Cash Flows net of acquired cash and cash equivalents.

The acquisitions were accounted for as business combinations using the acquisition method, and accordingly, the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquired entity was recorded at their estimated fair values at the date of acquisition. The primary items that generated the goodwill are the value of the synergies between the acquired companies and IBM and the acquired assembled workforce, neither of which qualify as an amortizable intangible asset. The overall weighted-average life of the identified amortizable intangible assets acquired is 6.8 years. These identified intangible assets will be amortized on a straight-line basis over their useful lives. Goodwill of $434 million has been assigned to the Software segment and goodwill of $11 million has been assigned to the Global Technology Services segment. It is expected that 1 percent of the goodwill will be deductible for tax purposes.

Divestitures:

Microelectronics

On October 20, 2014, IBM and GLOBALFOUNDRIES announced a definitive agreement in which GLOBALFOUNDRIES will acquire the company’s Microelectronics business, including existing semiconductor manufacturing assets and operations in East Fishkill, NY and Essex Junction, VT. The commercial OEM business to be acquired by GLOBALFOUNDRIES includes custom logic and specialty foundry, manufacturing and related operations.

The companies have also agreed to a ten year exclusive manufacturing sourcing agreement in which GLOBALFOUNDRIES will provide server processor semiconductor technology for use in IBM Systems. The agreement provides the company with capacity 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 I/T, supply chain, packaging and test services and lab services. The initial term for these transition 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.

In the third quarter, the company recorded a pre-tax charge of $4.7 billion related to the sale of the Microelectronics disposal group, which was part of the Systems and Technology reportable segment. The pre-tax charge was recorded to reflect 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 billion of other related costs. The asset impairment was reflected in property, plant and equipment, net and the other 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 September 30, 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 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 component under accounting guidance. The continuing cash inflows and outflows with the discontinued component are related to the manufacturing sourcing arrangement and the transition, packaging 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.

Summarized financial information for discontinued operations is shown below.


	Three Months Ended September 30,				Nine Months Ended September 30,
(Dollars in millions)	2014		2013		2014		2013
Total revenue	$	360	$	383	$	925	$	1,070
Loss from discontinued operations, before tax	$	(141)	$	(159)	$	(520)	$	(580)
Loss on disposal, before tax		(4,697)		–		(4,697)		–
Total loss from discontinued operations,	$	(4,838)	$	(159)	$	(5,217)	$	(580)
before income taxes
Provision/(benefit) for income taxes		(1,401)		(61)		(1,519)		(215)
Loss from discontinued operations, net of tax	$	(3,437)	$	(98)	$	(3,698)	$	(366)

					At September 30,		At December 30,
(Dollars in millions)						2014		2013
Assets:
Accounts receivable					$	208	$	166
Inventory						435		481
Property, plant & equipment, net						0		2,322
Other assets						103		90
Total assets					$	746	$	3,059
Liabilities:
Accounts payable					$	154	$	172
Deferred income						87		84
Other liabilities						163		20
Total liabilities					$	404	$	276

Industry Standard Server

On January 23, 2014, IBM and Lenovo Group Limited (Lenovo) announced a definitive agreement in which Lenovo would acquire the company’s industry standard server portfolio for an adjusted purchase price of $2.1 billion, consisting of approximately $1.8 billion in cash, with the balance in Lenovo common stock. The stock represented less than 5 percent equity ownership in Lenovo. The company would sell to Lenovo its System x, BladeCenter and Flex System blade servers and switches, x86-based Flex integrated systems, NeXtScale and iDataPlex servers and associated software, blade networking and maintenance operations.

IBM and Lenovo have entered into a strategic relationship which will include a global OEM and reseller agreement for sales of IBM’s industry-leading entry and midrange Storwize disk storage systems, tape storage systems, General Parallel File System software, SmartCloud Entry offering, and elements of IBM’s system software, including Systems Director and Platform Computing solutions. Effective with the initial closing of the transaction, Lenovo has assumed related customer service and maintenance operations. IBM will continue to provide maintenance delivery on Lenovo’s behalf for an extended period of time. In addition, as part of the transaction agreement, the company will provide Lenovo with certain transition services, including IT, supply chain and warranty services. The initial term for these transition services ranges from less than one year to three years. Lenovo can renew certain services for an additional year.

As of September 30, 2014, the company had received all regulatory approvals, and the activities necessary to separate the tangible assets and prepare such assets for sale in order to close the transaction were completed. The transaction will be completed in phases, and the initial closing occurred on October 1, 2014. The transaction is expected to close in most other countries in which there is a larger business footprint in the fourth quarter of 2014, with the remaining countries in early 2015.

The company expects to recognize a total pre-tax gain on the sale of approximately $1.5 billion, which does not include associated costs related to transition and performance-based costs. Net of these charges, the pre-tax gain is approximately $1.0 billion, substantially all of which will be recorded in the fourth quarter of 2014.

The company’s industry standard server business is reported in the Systems and Technology segment, and the associated maintenance operations are part of the Global Technology Services segment. In 2013, this combined business delivered approximately $4.6 billion of revenue and was essentially breakeven on a pre-tax income basis.

As of September 30, 2014, the industry standard server business had $310 million of total assets and $468 million of total liabilities which the company reported as held for sale on that date. The classification of the related assets and liabilities as held for sale at September 30, 2014 was based on meeting all of the criteria for such classification in the applicable accounting guidance. While the company met certain criteria for held for sale classification in prior periods, it did not meet the criteria that the disposal group was available for immediate sale in its present condition until September 30, 2014. Prior to that date, the company was engaged in the regulatory review process and in the activities necessary to separate the tangible assets and prepare such assets for sale. The assets held for sale at September 30, 2014 were comprised of: property, plant and equipment $131 million, inventory $133 million and intangible assets $47 million. Liabilities were comprised of: deferred income $342 million and warranty $125 million.

In addition, at September 30, 2014, the company concluded that the industry standard server systems business did not meet the criteria for discontinued operations reporting. The disposal group consists of the industry standard server systems business and associated maintenance operations. The industry standard server systems business constitutes a component under accounting guidance, while the maintenance operations do not meet the definition of a component. Due to the significance of the continuing cash flows with the disposal group after the transaction closes, the company did not meet the criteria to report the industry standard server systems business as a discontinued operation.

Customer Care

On September 10, 2013, IBM and SYNNEX announced a definitive agreement in which SYNNEX would acquire the company’s worldwide customer care business process outsourcing services business for $501 million, consisting of approximately $430 million in cash, net of balance sheet adjustments, and $71 million in SYNNEX common stock, which represented less than 5 percent equity ownership in SYNNEX. As part of the transaction, SYNNEX entered into a multi-year agreement with the company, and Concentrix, SYNNEX’s outsourcing business, has become an IBM strategic business partner for global customer care business process outsourcing services.

In the third quarter 2014, the company completed the final wave of closings which resulted in the transfer of the remaining customer care business assets to SYNNEX. A nominal amount of expense was recorded during the quarter to record certain transaction related expenses. Through the first nine months of 2014, the company has recorded a pre-tax gain of $212 million related to this transaction. The remaining financial impact associated with this transaction is expected to occur in the fourth quarter 2014, pending determination of final balance sheet adjustments.

Retail Store Solutions

On April 17, 2012, the company announced that it had signed a definitive agreement with Toshiba TEC for the sale of its Retail Store Solutions business. As part of the transaction, the company agreed to transfer the maintenance business to Toshiba TEC within three years of the original closing of the transaction.

In the third quarter of 2014, the company completed the third phase of the transfer of the maintenance workforce to Toshiba. Subsequent wave closings are scheduled to be completed through the first quarter of 2015 along with associated parts and inventory transfer. The third phase transfer and an assessment of the ongoing contractual terms of the overall transaction resulted in the recognition of an additional pre-tax gain of $6 million in the third quarter of 2014.

The company expects to close the final phase of the divestiture in the first quarter of 2015. Overall, the company expects to recognize a cumulative total pre-tax gain on the sale of approximately $508 million.

Others

On August 31, 2014, the company announced that it signed a definitive agreement with UNICOM Systems Inc whereby UNICOM acquired a non-strategic set of Cognos products. IBM acquired this product set through the acquisition of Cognos in 2008.

On September 30, 2014, the company announced that it signed a definitive agreement with Rocket Software (Rocket) whereby Rocket acquired IMS Tools. IMS Tools was developed in 2000 for database management, performance and recovery tooling.

On September 30, 2014, the company announced that it signed a definitive agreement with Kewill, whereby Kewill acquired the IBM Transportation Management System (TMS).

On September 30, 2014, the company announced that it signed a definitive agreement with Rogue Wave Software (RW) whereby RW acquired the JViews Enterprise, Elixir, and Visualization for .NET products.

All of the above transactions closed in the third quarter of 2014 and the financial terms related to these transactions were not material. Overall, the company recorded a pre-tax gain of $78 million related to these transactions in the third quarter of 2014.

On June 30, 2014, the company completed the divestiture of its Solid DB suite of products to UNICOM. Also on June 30, 2014, the company completed the divestiture of its Human Capital Management business line in France to Sopra Group. Financial details for both transactions were not material.