Market rewards $1 trillion IBM spin off with share price gain
12 October 2020 | Melanie Mingas
IBM’s share price rallied 6% on Friday following confirmation it is to spin off its legacy IT infrastructure operations as it taps a US$1 trillion “hybrid cloud opportunity”.
IBM said the separation of its Managed Infrastructure Services unit is expected to be achieved as a tax-free spin-off to shareholders and completed by the end of 2021.
The move will liberate IBM to pursue its hybrid cloud growth strategy as it chases what CEO Arvind Krishna said is a $1 trillion opportunity.
“Client buying needs for application and infrastructure services are diverging, while adoption of our hybrid cloud platform is accelerating,” said Krishna.
“Now is the right time to create two market-leading companies focused on what they do best. IBM will focus on its open hybrid cloud platform and AI capabilities. NewCo will have greater agility to design, run and modernise the infrastructure of the world's most important organisations. Both companies will be on an improved growth trajectory with greater ability to partner and capture new opportunities – creating value for clients and shareholders,” he added.
As a result of the new structure, IBM said it expects third quarter revenues of $17.6 billion, GAAP diluted earnings per share from continuing operations of $1.89, and operating (non-GAAP) earnings per share of $2.58 for the period ending September 30, 2020.
The move followed IBM’s 2019, $34 billion acquisition of Red Hat and will see tighter integration and focus on open hybrid cloud and AI solutions. In terms of revenue generation, IBM is expecting to see a shift from services to solutions and said it will “have more than 50% of its portfolio in recurring revenues”, as a result of the spin off.
Further, IBM said it was taking this opportunity to streamline its geographic model and transform its go-to-market structure while “continuing to consolidate its shared services.”
“This simplified and focused operating model will support accelerated innovation for the hybrid cloud, and provide more flexibility to increase investment in growth areas. The result will be an enhanced financial profile with a clear trajectory for improved revenue and profit growth,” the company said in a statement.
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IBM said its as yet unnamed new entity “will immediately be the world's leading managed infrastructure services provider”, leveraging IBM’s existing relationships with more than 4,600 technology-intensive, highly regulated clients in 115 countries, including more than 75% of the Fortune 100.
It said its new entity will be “entirely focused on managing and modernising client-owned infrastructures”, which it said represents a $500 billion market opportunity. It will offer: hosting and network services, services management, infrastructure modernisation, and migrating and managing multi-cloud environments.
“These are critical services that are core to client operations,” IBM said.
The firm continued to state that the new division will extend its leadership through “increased investment in the next generation of transformational managed infrastructure services, with more opportunity for margin expansion, profit growth and cash generation”. Further, it will be able to partner fully across all cloud vendors, opening new avenues for growth, while maintaining a strong strategic partnership with IBM and continuing to serve existing and new clients.
The news adds to an already busy 2020 for IBM.
In July, Verizon Business and IBM entered into a collaboration to develop 5G and edge computing innovations. The project will see the two working on solutions that combines the high speed and low latency of Verizon's 5G and multi-access edge compute capabilities, IoT devices and sensors at the edge, and IBM's experience in AI, hybrid multi-cloud, edge computing, asset management and connected operations.
Meanwhile in September, Ribbon Communications joined the IBM Cloud for financial services ecosystem, announcing it is to roll out its Unified Communications as-a-Service (UCaaS) offering to the platform.
The IBM Cloud for financial services is designed to help institutions safely migrate their operations to the cloud and leverage cloud-native technologies from IBM's Independent Software Vendor (ISV) and Software-as-a-Service (SaaS) vendor partners.
As Data Economy reported, in the Middle East this year IBM also opened its first two regional data centres, located in Dubai and Abu Dhabi to support customers there in stheir transition to the cloud.
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