IBM to spin off $19B business to focus on cloud computing

Keywords cloud / Spinoffs / Technology

International Business Machines Corp. says it is breaking off a $19 billion chunk of its business to focus on cloud computing.

The 109-year-old tech company said Thursday it is spinning off its managed infrastructure services unit into a new public company, temporarily named NewCo. The separation is expected to take effect by late 2021.

IBM CEO Arvind Krishna said the split will help IBM focus on its cloud platform and artificial intelligence, while the newly formed company will provide services to manage the infrastructure of businesses and other organizations.

IBM’s annual revenue was $77.1 billion last year. Krishna said in April at his first quarterly earnings call as CEO that the company will continue to eliminate software and services that don’t align with IBM’s top two focus areas for growth: cloud computing and artificial intelligence.

Once a household name for its personal computers, IBM shed its PC business in 2005 and has since become focused on supplying software services to big businesses, governments and other organizations. It has worked to strengthen its cloud computing business but has struggled to compete with top cloud rivals Amazon, Microsoft and Google.

The new unit, now part of its global technology services division, serves 4,600 clients and has an order backlog of $60 billion, according to a statement Thursday. The company said it aims to complete the transaction as a tax-free spinoff.

The spin-off is the fourth major transformation for IBM in its history and is the first big move by Krishna, who took over from Ginni Rometty in April. Krishna is attempting to revive IBM, whose legacy is mainframe computers and technology services, by pinning its future on higher-margin cloud computing.

IBM is aiming to become the leader in hybrid-cloud software and services that let clients store data in private servers and in public clouds, including those run by rivals Inc. and Microsoft Corp. In 2018, IBM spent $34 billion to buy open source software provider Red Hat to aid that transition.

“Today is a landmark day for our company,” Krishna said on a call with analysts. “We are redefining the future of IBM.”

Shares in IBM rose 8.8% in premarket trading in New York. The company’s shares have declined 7.4% this year, giving it a market value of $110 billion as of the close Wednesday.

IBM’s large legacy of IT products has been a drag on growth, according to Bloomberg Intelligence analyst Anurag Rana. “Unloading lower-growth businesses could unlock the true value of Red Hat, which we calculate at over $50 billion,” he said, adding that the spinoff is “exciting news for IBM.” The move will make IBM more of a software company and less of a low-growth services vendor, possibly aiding its valuation, Rana said.

The new company, to be named at a later date, will manage and modernize corporate clients’ infrastructures, a $500 billion market opportunity, using artificial intelligence and automation, IBM said.

IBM’s services business has been struggling, as many of its clients delayed purchases of information technology or software upgrades to focus on short-term stability and cash preservation to survive the pandemic. In the second quarter, revenue declined in the tech support units Global Business Services and Global Technology Services, which account for about 56% of IBM’s total revenue. Meanwhile cloud revenue increased 30%.

After separation, the companies together are initially expected to pay a combined quarterly dividend that is no less than IBM’s pre-spin dividend per share, according to the statement. IBM said it will take a $2.3 billion charge in the fourth quarter.

IBM also announced preliminary third-quarter results Thursday. The company expects revenue of $17.6 billion, in line with analysts’ estimates, and operating earnings of $1.89 a share. Analysts were projecting $2.02 a share on that basis. IBM reports earnings Oct. 19.

Krishna told analysts to expect IBM to remain acquisitive as it continues hunting for revenue growth.

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