[ad_1]
NEW YORK (BLOOMBERG) – International Business Machines or IBM is spinning off a slower-growing company that manages corporate IT systems so it can focus on booming demand for cloud services and increase competition with Amazon.com and Microsoft.
The new unit, currently part of IBM’s global technology services division, handles day-to-day infrastructure services operations such as customer data center management and traditional information technology support for install, repair and operate equipment. It serves 4,600 clients and has an order book of $ 60 billion, according to an IBM statement on Thursday (October 8).
The move essentially splits IBM in two, splitting its legacy IT management services from its new AI and hybrid cloud computing unit, which the company hopes will bring revenue growth and relevance back to it. IBM said it aims to complete the transaction as a tax-free spin-off for IBM shareholders by the end of 2021.
The move is the fourth major transformation for IBM in its 109-year history and is the first major move by CEO Arvind Krishna, who replaced Ginni Rometty in April and has been pushing to reignite growth after nearly a decade of downsizing. income. . Krishna earlier this year cut thousands of jobs when he began to remodel the business.
Once an iconic top-of-the-line company, IBM’s star has faded over the years as its legacy in mainframe computing and IT services lagged behind, while more technology companies Newcomers like Amazon were launched to dominate the emerging market for cloud computing.
Now IBM is planning its recovery, with the goal of becoming the leader in what it calls hybrid cloud software and services that allow clients to store data on private servers and in public clouds, including those managed by Amazon and Microsoft. In 2018, IBM spent US $ 34 billion (S $ 46 billion) to buy open source software provider Red Hat to help with that transition.
“Today is a historic day for our company,” Krishna said in a call on Thursday. “We are redefining the future of IBM.” The new strategy “will unlock growth” on both sides of IBM’s business, the CEO said, predicting that the deal would provide “sustainable mid-single-digit revenue growth” at IBM over the medium term.
Shares of IBM rose as much as 9.2 percent, the most in six months. They closed nearly 6 percent at $ 131.49, the biggest winner on the Dow Jones industrial average. The company’s shares have fallen nearly 7 percent this year through Wednesday, giving it a market value of $ 110 billion.
“IBM has been struggling for the last four or five years,” said Wedbush Securities analyst Moshe Katri. “This is something that has been long overdue and I think Arvind is making the right decisions.” Forrester Research analyst Ted Schadler agreed. “We like this deal for both sides of the game,” he said.
The new company will manage and modernize the infrastructures of corporate clients, a $ 500 billion market opportunity, using artificial intelligence and automation, according to IBM. The original IBM will focus on the “billion dollar hybrid cloud opportunity,” Krishna said.
The spin-off “essentially takes more than 50% of the business and splits it into a separate company,” said James Cortada, who spent decades at IBM and has written books about the company. “By dividing in two, it will be easier for each business to prosper based on its own characteristics.”
This change will also help eliminate the long-standing rivalry between the fast-growing new part of IBM’s business and the old one.
IBM’s great legacy of IT products has been a drag on growth, according to Anurag Rana, an analyst at Bloomberg Intelligence. “The elimination of the slower growing companies could unlock the true value of Red Hat, which we estimate at more than $ 50 billion,” he said, adding that the spin-off is “exciting news for IBM.” The move will make IBM more of a software company and less of a low-growth service provider, possibly contributing to its valuation, Rana said.
IBM’s services business has struggled as many of its clients delayed purchases of information technology or software updates to focus on short-term stability and preservation of cash to survive the pandemic. IBM’s global technology services division, where the new company is currently located, posted a 6% revenue drop last year to $ 27.4 billion. In the second quarter, revenue declined in the Global Business Services and Global Technology Services technical support units, which account for about 56% of IBM’s total revenue. Meanwhile, cloud revenue increased 30%.
After the separation, the companies together are expected to initially pay a combined quarterly dividend that is no less than the dividend per share prior to IBM’s rotation, 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 on Thursday. The company expects revenue of $ 17.6 billion, in line with analyst estimates, and adjusted operating earnings of $ 2.58 per share. Analysts were projecting $ 2.56 per share on that basis. IBM reports earnings on October 19.
Krishna told analysts that they expect IBM to remain acquisitive as it continues to pursue revenue growth.
[ad_2]
