Say Goodbye To IBM: The computer giant has announced restructuring plans to split into two public companies

October 30, 2020

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2 min read

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What's going on here?

In an attempt to reinvent itself, IBM is set to split into two publicly traded entities, with one focusing on the delivery of hybrid cloud services to businesses, and the other specialising in the delivery of managed infrastructure services.

What does this mean?

On Thursday 8 October, International Business Machines Corp., better known as IBM or “Big Blue”, announced plans to split into two companies by the end of 2021. 

The first company – which will remain as ‘IBM’ – is dedicated to cloud services. IBM CEO Arvind Krishna said the company is “laser-focused” on tapping into the “$1tn hybrid cloud opportunity” as businesses accelerate their plans to move to the cloud. IBM’s hybrid cloud and AI company has an expected revenue of $59 billion.

The second company is focused on IBM’s shrinking, low-margin Managed Infrastructure Services division and legacy IT business. It has been given the interim name of ‘NewCo’ until next year. NewCo’s expected revenue is roughly a quarter of IBM’s cloud services and will employ approximately 90,000 of the 325,000 existing IBM workers. 

IBM has been shifting towards cloud computing for some time now and cloud services have given the company a much-needed boost amid this pandemic. To read our article on this, click here.

Plans are in place for IBM and NewCo to uphold a strategic partnership.

What's the big picture effect?

Mr Krishna is betting on cloud computing to be the major source of growth for the company going forward. After a decade of poor performance, the 109-year-old company has fallen behind its rivals. With the split set to cost several billion dollars, research suggests that the restructuring might not lead to the speedy expansion Mr Krishna is hoping for. 

Boyar Research (a New York investment research firm) has studied 246 spinoffs in the US. The research found a disappointing outcome in most cases. Companies generally did well in their first year but after five years, just over a third were performing better than the S&P 500 index (a barometer of performance for 500 large companies listed on stock exchanges in the US). More worryingly for IBM, the research shows that parent companies did poorly in the five years after spinoffs. On average, shares for the parent company trailed the stock index.

Having said this, I wouldn’t underestimate IBM’s ability to shed businesses to reinvent itself. The company was a pioneer in personal computers but exited under pressure from more-nimble rivals such as Dell Technologies. IBM also cashed in on its PC business by selling to China’s Lenovo Group in 2005 for $1.25 billion – a deal widely regarded as smart business.

In the long term, Lisa Ellis (Analyst, MoffettNathanson) believes that it is the right move for the company, allowing IBM and NewCo to capitalise on their respective strengths. “It’s like a good divorce,” she said. “Painful to get through and expensive, but ultimately the two entities are better off separate from each other.”

Report written by Thomas Farrell

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