Acquisitions/Divestitures

3 Months Ended

Mar. 31, 2015

9. Acquisitions/Divestitures:

Acquisitions: During the three months ended March 31, 2015, the company completed two acquisitions at an aggregate cost of $47 million.

The Software segment completed acquisitions of two privately held businesses in the first quarter: AlchemyAPI, Inc. (AlchemyAPI) and Blekko, Inc. (Blekko).

The following table reflects the purchase price related to these acquisitions and the resulting purchase price allocations as of March 31, 2015

		Amortization			Total
(Dollars in millions)		Life (in yrs.)			Acquisitions
Current assets				$	1
Fixed assets/noncurrent assets					1
Intangible assets:
	Goodwill		N/A		36
	Completed technology		5		10
	Patents/trademarks		3-5		3
Total assets acquired					51
Current liabilities					0
Noncurrent liabilities					(3)
Total liabilities assumed					(3)
Total purchase price				$	47

N/A - not applicable

Each acquisition further complemented and enhanced the company’s portfolio of product and services offerings. AlchemyAPI is a leading provider of scalable cognitive computing application program interface (API) services and computing applications. Blekko technology provides advanced Web-crawling, categorization and intelligent filtering. Purchase price consideration for these acquisitions as reflected in the table above, was 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 businesses 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 4.9 years. These identified intangible assets will be amortized on a straight-line basis over their useful lives. Goodwill of $36 million has been assigned to the Software segment. It is expected that approximately 11 percent of the goodwill will be deductible for tax purposes.

On April 13, 2015, IBM announced a definitive agreement for the purchase of Phytel. Phytel is a leading provider of integrated population health management software that specializes in an engagement system that analyzes patient behavior and activity and looks for optimal outcomes. The engagement platform reminds patients about things such as appointments and prescription refills. This transaction is expected to close in the second quarter of 2015.

On April 13, 2015, IBM announced the acquisition of Explorys. Explorys is a healthcare intelligence cloud company that has built one of the largest clinical data sets in the world specializing in real time data collection used to link healthcare data for analytics, both clinical and financial. At the date of issuance of the financial statements, the initial business combination accounting was not complete for this acquisition.

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 10-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 IT, 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. The transaction 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 sale of the Microelectronics 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 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 March 31, 2015. 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 March 31, 2015. 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 between $200 million and $250 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 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 March 31,
(Dollars in millions)	2015		2014
Total revenue	$	339	$	248
Loss from discontinued operations, before tax	$	(105)	$	(203)
Loss on disposal, before tax		(14)		–
Total loss from discontinued operations,	$	(119)	$	(203)
before income taxes
Provision/(benefit) for income taxes		(31)		(56)
Loss from discontinued operations, net of tax	$	(88)	$	(146)

	At March 31,		At December 31,
(Dollars in millions)		2015		2014
Assets:
Accounts receivable	$	211	$	245
Inventory		361		380
Property, plant & equipment, net		–		–
Other assets		90		92
Total assets	$	662	$	717
Liabilities:
Accounts payable	$	186	$	177
Deferred income		91		87
Other liabilities		192		163
Total liabilities	$	470	$	427

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 (System x) 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 includes 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 and supply chain 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.

The initial closing occurred on October 1, 2014. A subsequent closing occurred in most other countries in which there was a large business footprint on December 31, 2014. The remaining countries closed on March 31, 2015. In line with these remaining countries closing and certain adjustments made to the provisions recorded at the time the transaction closed in the fourth quarter of 2014, an additional pre-tax gain of $16 million was recorded in the first quarter of 2015.

Overall, the company continues to expect 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 $1.2 billion, of which $1.1 billion was recorded in the fourth quarter of 2014. The balance of the gain is expected to be recognized in 2019 upon conclusion of the maintenance agreement.

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.

The initial closing of the transaction was completed on January 31, 2014, with subsequent closings occurring in 2014. In the fourth quarter of 2014, the company continued to work toward resolution of the required final balance sheet adjustments. A charge in the amount of $10 million was recorded to reflect the expected resolution. For the full year of 2014, the company recorded a pre-tax gain of $202 million related to this transaction.

Through the first quarter of 2015, final resolution of the required final balance sheet adjustments has not been concluded. As of March 31, 2015, the cumulative pre-tax gain attributed to this transaction remains at $202 million.

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 first quarter of 2015, the company completed the fifth phase of the transfer of the maintenance workforce to Toshiba. A subsequent wave closing is scheduled to be completed in the second quarter of 2015. The parts and inventory transfer to Toshiba will commence in the second quarter of 2015 and is expected to be completed by the third quarter of 2015. The workforce transfer and an assessment of the ongoing contractual terms of the transaction resulted in the recognition of pre-tax loss of $2 million in the first quarter of 2015.

The company expects to close the final phase of the divestiture in the third quarter of 2015. Overall, the company expects to recognize a cumulative total pre-tax gain on the sale of approximately $511 million of which $510 million has been recognized through March 31, 2015.

Others – In the first quarter of 2015, the company completed the divestiture of the Algorithmics Collateral Management suite of products to Smartstream Inc. and the divestiture of the Commerce ILOG Supply Chain Optimization Tools suite of products to Llamasoft, Inc.

The financial terms of each transaction were not material.