IBM said it would spin off its IT infrastructure unit into a new publicly traded company to focus its legacy business more on cloud computing, a high-margin segment that has seen a boost as companies increasingly ramp up their digital shift.
The 109-year-old company announced this week, which follows CEO Arvind Krishna’s longterm plan to streamline the sprawling business. Krishna took the reins of IBM in April 2020 after working on its $34 billion acquisition of open source software firm Red Hat from 2018 onwards. Red Hat’s software is key to IBM’s new hybrid cloud offerings.ares of the company close.
In a call with analysts, Krishna presented the split as the latest in a long line of divestments by IBM, as the company has sought to find more profitable ground throughout its long history. “We divested networking back in the ‘90s, we divested PCs back in the 2000s, we divested semiconductors about five years ago because all of them didn’t necessarily play into the integrated value proposition,” said Krishna, according to a report from Reuters.
Krishna, who took over as chief executive officer from Ginni Rometty in April, said IBM’s software and solutions portfolio will account for the majority of company revenue after the separation.
“IBM will focus on its open hybrid cloud platform and AI capabilities,” Krishna said earlier Thursday in a prepared statement. “NewCo will have greater agility to design, run and modernize the infrastructure of the world’s most important organizations. Both companies will be on an improved growth trajectory with greater ability to partner and capture new opportunities – creating value for clients and shareholders.”
Krishna led IBM’s $34 billion acquisition of Red Hat, an enterprise software maker that is now a part of IBM’s hybrid cloud division.
“The success we’ve had with Red Hat gives us confidence that this is the right move,” he added, calling the move a “significant shift” in the company’s business model. IBM’s Cloud and Cognitive Software segment, which includes Red Hat, produced $5.75 billion in revenue in its second quarter of 2020, slightly beating analysts’ estimates. The Global Technology Services unit, which is the portion from which the new company is being spun out, booked $6.32 billion in Q2, a drop of 8% from the previous year.
The new IBM will be mostly focused on its hybrid cloud platform, which the firm says represents a $1 trillion market opportunity. Right now, the cloud market is dominated by Amazon and Microsoft, but continues to see strong growth, particularly as the global pandemic encourages remote work.
“With tighter integration and focus on its open hybrid cloud and AI solutions, IBM will move from a company with more than half of its revenues in services to one with a majority in high-value cloud software and solutions,” said IBM in a press release.
Speaking to Reuters, market analyst Moshe Katri of Wedbush Securities said the split was a smart move. “IBM is essentially getting rid of a shrinking, low-margin operation given the cannibalizing impact of automation and cloud, masking stronger growth for the rest of the operation,” said Katri.
