Acquisitions/Divestitures

6 Months Ended

Jun. 30, 2015

9. Acquisitions/Divestitures:

Acquisitions: During the six months ended June 30, 2015, the company completed five acquisitions at an aggregate cost of $660 million.

The Software segment completed acquisitions of four privately held businesses: in the first quarter, AlchemyAPI, Inc. (AlchemyAPI) and Blekko, Inc. (Blekko); and in the second quarter, Explorys, Inc. (Explorys) and Phytel, Inc. (Phytel). Global Technology Services (GTS) completed one acquisition: in the second quarter, Blue Box Group, Inc. (Blue Box), a privately held company.

Each acquisition is expected to enhance the company’s portfolio of product and services capabilities. AlchemyAPI is a leading provider of scalable cognitive computing application program interface services and computing applications. Blekko technology provides advanced Web-crawling, categorization and intelligent filtering. Explorys provides secure cloud-based solutions for clinical integration, at-risk population management, cost of care measurement and pay-for-performance. Phytel is a leading provider of SaaS-based population health management offerings that help providers identify patients at risk for care gaps and to engage the patient to begin appropriate preventative care. Blue Box provides hosted, managed, OpenStack-based production-grade private clouds for the enterprise and service provider markets. Purchase price consideration for these acquisitions as reflected in the following table, was paid primarily in cash. All acquisitions are reported in the Consolidated Statement of Cash Flows net of acquired cash and cash equivalent.

The following table reflects the purchase price related to these acquisitions and the resulting purchase price allocations as of June 30, 2015

		Amortization			Total
(Dollars in millions)		Life (in yrs.)			Acquisitions
Current assets				$	17
Fixed assets/noncurrent assets					54
Intangible assets:
	Goodwill		N/A		527
	Completed technology		5-7		74
	Client relationships		7		41
	Patents/trademarks		3-5		12
Total assets acquired					725
Current liabilities					(14)
Noncurrent liabilities					(51)
Total liabilities assumed					(65)
Total purchase price				$	660

N/A - not applicable

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 6.5 years. These identified intangible assets will be amortized on a straight-line basis over their useful lives. Goodwill of $465 million was assigned to the Software segment and goodwill of $62 million was assigned to the Global Technology Services segment. It is expected that 1 percent of the goodwill will be deductible for tax purposes.

On July 23, 2015, the company announced the acquisition of Compose, Inc., a privately held company that provides auto-scaling, production-ready databases that help developers deploy data services quickly and easily. At the date of issuance of the financial statements, the initial purchase accounting was not complete for this acquisition.

Divestitures:

Microelectronics – On October 20, 2014, IBM and GLOBALFOUNDRIES announced a definitive agreement in which GLOBALFOUNDRIES would 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 transaction closed on July 1, 2015.

The transaction includes 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, 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.

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 Hardware 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 June 30, 2015. Additional pre-tax charges of $51 million were recorded in the first half of 2015 related to the disposal. The cumulative pre-tax charge was $4.8 billion as of June 30, 2015. Additional charges may be recorded in future periods.

All assets and liabilities of the business are reported as held for sale at June 30, 2015. The cash consideration is expected to be transferred over three years. On the closing date, the company transferred $472 million of net cash to GLOBALFOUNDRIES. This amount included $750 million of cash consideration, adjusted by the amount of working capital due from GLOBALFOUNDRIES and other miscellaneous items.

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 in the tables below.


	Three Months Ended June 30,				Six Months Ended June 30,
(Dollars in millions)	2015		2014		2015		2014
Total revenue	$	381	$	317	$	720	$	565
Loss from discontinued operations, before tax	$	(74)	$	(177)	$	(179)	$	(379)
Loss on disposal, before tax		(37)		—		(51)		—
Total loss from discontinued operations,
before income taxes	$	(111)	$	(177)	$	(230)	$	(379)
Provision/(benefit) for income taxes		(34)		(62)		(65)		(119)
Loss from discontinued operations, net of tax	$	(77)	$	(115)	$	(165)	$	(261)

					At June 30,		At December 31,
(Dollars in millions)						2015		2014
Assets:
Accounts receivable					$	207	$	245
Inventory						348		380
Property, plant & equipment – net						—		—
Other assets						106		92
Total assets					$	661	$	717
Liabilities:
Accounts payable					$	207	$	177
Deferred income						74		87
Other liabilities						196		163
Total liabilities					$	478	$	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 entered into a strategic relationship which included 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 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 was completed 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 resulting in a pre-tax gain of $16 million in the first quarter of 2015. In the second quarter of 2015, an additional pre-tax gain of $36 million was recorded attributed to certain adjustments resolved during the quarter.

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, became an IBM strategic business partner for global customer care business process outsourcing services.

The initial closing 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 pre-tax 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.

In the second quarter of 2015, resolution of the final balance sheet adjustments was concluded. As a result, the company made a payment of $43 million to SYNNEX. Additionally, SYNNEX remitted to the company $40 million to settle the remaining consideration due related to this transaction. Through June 30, 2015, the cumulative pre-tax gain attributed to this transaction is $208 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 second quarter of 2015, the company completed the final phase of the transfer of the maintenance workforce to Toshiba. The parts and inventory transfer to Toshiba will commence in the third quarter of 2015 and is expected to be completed by the fourth quarter of 2015. The workforce transfer and an assessment of the ongoing contractual terms of the transaction resulted in the recognition of a pre-tax gain of $1 million in the second quarter of 2015.

Overall, the company has recognized a cumulative total pre-tax gain on the sale of approximately $511 million.

Others ‒ In the second quarter of 2015, the company completed the divestiture of its Travel & Transportation kiosk business to Embross North America Ltd., and the divestiture of its Telecom Expense Management product to Tangoe, Inc.

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.