IBM to Spin Off Legacy IT Business, Pegging Future on Cloud

(Bloomberg) - International Business Machines Corp. founds a slower growing company managing enterprise computing systems to focus on the boom in cloud service demand and compete with Amazon.com Inc. and Microsoft Corp. to tighten.
The new entity, currently part of IBM's global Technology Services division, will handle day-to-day operations of infrastructure services such as client data center management and traditional information technology support for the installation, repair and operation of equipment. The company serves 4,600 customers and has an order book of $ 60 billion, according to a statement from IBM Thursday.
The move essentially splits IBM in two, separating its legacy IT management services from its new hybrid cloud computing and artificial intelligence unit, which it hopes will return to revenue growth and relevance. IBM has announced that it will complete the transaction as a tax-free spin-off to IBM shareholders by the end of 2021.
The move marks the fourth major shift for IBM in its 109-year history and the first major step by Chief Executive Officer Arvind Krishna, who replaced Ginni Rometty in April and pushed for a revival of growth after nearly a decade of declining sales. Krishna cut thousands of jobs earlier this year when he began transforming the business.
Once a legendary blue-chip company, the star of IBM has faded over the years as its legacy in mainframe computing and IT services fell behind while newer tech companies like Amazon dominated the burgeoning cloud computing market .
Now, IBM is planning its upswing to become the leader in so-called hybrid cloud software and services that allow customers to store data on private servers and in public clouds, including those from Amazon and Microsoft Corp. operated. In 2018, IBM spent $ 34 billion to buy open source software provider Red Hat to aid this transition.
"Today is a milestone for our company," said Krishna when he called on Thursday. "We're redefining the future of IBM." The new strategy will unleash "growth" on both sides of IBM's business, the CEO said, and forecast that the deal would result in "sustained mid-single-digit sales growth" at IBM in the medium term.
IBM shares rose 9.2%, the most in six months. They were up 5.2% to $ 130.47 at 1:53 p.m. in New York the biggest winner in the Dow Jones Industrial Average. The company's shares are down 7.4% this year through Wednesday, for a market value of $ 110 billion.
"IBM has been struggling for the past four to five years," said Moshe Katri, an analyst at Wedbush Securities Inc. "This is long overdue and I think Arvind is making the right calls." Ted Schadler, an analyst at Forrester Research Inc., agreed. "We like this deal for both sides of the party," he said.
The new company will manage and modernize enterprise customer infrastructures, a $ 500 billion market opportunity using artificial intelligence and automation, according to IBM. The original IBM will focus on the "$ 1 trillion hybrid cloud opportunity," said Krishna.
The spin-off "essentially takes over 50% of the business and cuts it off into a separate company," said James Cortada, who spent decades at IBM and has written books about the company. "Splitting it in two makes it easier for any business to thrive based on its own characteristics."
This shift will also help eliminate the longstanding rivalry between the new, fast-growing part of IBM's business and the old.
Anurag Rana, an analyst at Bloomberg Intelligence, said IBM's vast legacy of IT products has weighed on growth. "Discharging companies with lower growth could unlock Red Hat's true value, which we estimate to be over $ 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, which may help the valuation, Rana said.
IBM's service business has struggled as many of its customers delayed purchasing information technology or software upgrades to focus on short-term stability and cash preservation and weather the pandemic. In the global Technology Services division of IBM, in which the new company is currently based, sales fell 6% to $ 27.4 billion last year. In the second quarter, revenue declined in the Global Business Services and Global Technology Services technical support departments, which account for approximately 56% of total IBM revenue. Meanwhile, cloud sales have increased by 30%.
After the split, the companies are initially expected to receive a combined quarterly dividend, which it said is no less than IBM's pre-spin dividend per share. IBM announced that it will incur a charge of $ 2.3 billion in the fourth quarter.
IBM also announced preliminary results for the third quarter on Thursday. The company expects sales of $ 17.6 billion and adjusted operating income of $ 2.58 per share, according to analyst estimates. On this basis, analysts forecast a share of USD 2.56 per share. IBM reports profit on October 19th.
Krishna told analysts they should expect IBM to continue to acquire as the company continues to look for revenue growth.
IBM was acquired by JPMorgan Chase & Co. and Lazard Ltd. and the law firm Paul, Weiss, Rifkind, Wharton & Garrison LLP.
(Updates with CEO comments in the seventh paragraph and analysts in the eighth chart)
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