IBM CEO: Why we just made this 'landmark' business move
IBM CEO Arvind Krishna, who succeeded Ginni Rometty in April, wasted no time putting his stamp on Big Blue.
Tech giant (IBM) stocks rose 7% Thursday after it was announced that the company will be outsourcing its managed infrastructure services business within its global technology services business. This will create a new stock corporation called “NewCo” by the end of 2021. By spinning off the business, Krishna wants IBM to focus on its opportunities in the hybrid cloud after acquiring Red Hat in 2019.
"I think today is a milestone for our company," Krishna told Yahoo Finance's The First Trade. “When I first became CEO, I spoke of a relentless focus on growth. And when we look at the growth, we've also said it will focus on hybrid cloud and AI. That is a total addressable market of trillions of dollars. With this trillion dollar marketplace and our confidence in the platform powered by Red Hat technologies, now is the time to double the hybrid cloud. "
Krishna and CFO Jim Kavanaugh made it clear to Wall Street in a July earnings call that work on realigning the portfolio is already well underway. For longtime IBM observers on the sales side, the spin-off shouldn't come as a shock. For the occasional IBM observer who has seen stocks lagging under Rometty for years, the breakaway from Krishna is likely a "hello, welcome to the new IBM moment."
FILE - In this file photo dated March 18, 2019, the logo for IBM appears above a trading post on the floor of the New York Stock Exchange. IBM says it is shutting down a $ 19 billion portion of its business to focus on cloud computing. The 109-year-old tech company announced on Thursday, October 8th, 2020 that it is spinning its managed infrastructure services unit into a new public company, temporarily named NewCo. (AP Photo / Richard Drew, File)
In one fell swoop, Krishna signaled that there are no sacred cows (other than hybrid cloud) at IBM, and he wants to run a more focused company. With better focus, this often means the opportunity to increase profit margins (cost reductions, add-on growth acquisitions, etc.) and get the stock going again in the process. It is possible that the proceeds from the spin-off will also be used in a shareholder-friendly manner - think of special dividends or share buybacks.
Whether the IBM stock comes many times closer to other cloud games like Microsoft and Amazon (the price-earnings ratio for IBM before the deal was about 9.5 times compared to 31 times for Microsoft, according to Yahoo Finance Premium data ) a wildcard. It will require strong execution by Krishna and possibly more portfolio redesign.
Of course, Krishna is aware of all of this.
"Wall Street rules multiples," said Krishna. “About half of the business will be software and solutions. So that itself tells you that there will be a mix change in the future that will go hand in hand with its own attractive investor base and its own attractive profile. Incidentally, that determines the multiple, which, as I said, is a result. "
Brian Sozzi is the editor-in-chief and co-host of The First Trade at Yahoo Finance. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn.
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