The 109-year-old tech giant IBM has announced an intriguing spinoff this week to accelerate its cloud and artificial intelligence (AI) growth strategy.
The time is right
The company will accelerate its hybrid cloud growth strategy to drive digital transformations for its clients as well as it will separate the managed infrastructure services unit of its global technology services division into a new public company referred to as “NewCo”. The new company will be named at a subsequent date.
“Today, hybrid cloud and AI are swiftly becoming the locus of commerce, transactions, and over time, of computing itself. This shift is driven by the changing needs of our clients, who find that choosing an open hybrid cloud approach is 2.5 times more valuable than relying on public cloud alone,” Arvind Krishna, IBM Chief Executive Officer says in a blogpost.
The separation is expected to be achieved as a tax-free spin-off to IBM shareholders and completed by the end of 2021.
“IBM is laser-focused on the $1T (approx €.84T) hybrid-cloud opportunity. Client buying needs for application and infrastructure services are diverging, while adoption of our hybrid cloud platform is accelerating. 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,” Krishna says.
He further adds that 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 its clients and shareholders.
To focus on Hybrid Cloud and AI
Back in 2018, IBM had acquired cloud company RedHat for $34B (approx €28.8B). This acquisition is IBM’s largest ever and the third-biggest in the history of US technology – also plays a key role to drive its growing cloud business.
Ginni Rometty, executive chair of the company – who was IBM’s CEO back then, says, “We have positioned IBM for the new era of hybrid cloud. Our multi-year transformation created the foundation for the open hybrid cloud platform, which we then accelerated with the acquisition of RedHat. At the same time, our managed infrastructure services business has established itself as the industry leader.”
IBM’s open hybrid cloud platform architecture, based on RedHat OpenShift, works with the entire range of clients’ existing IT infrastructures, regardless of vendor. This platform allows clients to “write-once/run-anywhere,” and enables a hybrid cloud approach that drives up to 2.5 times more value for clients than a public cloud-only solution.
NewCo
According to IBM, “NewCo” has relationships with more than 4,600 clients in 115 countries. Besides, it also has more than 75% of the Fortune 100 companies, a backlog of $60B (approx €50.7B), and more than twice the scale of its nearest competitor.
The new company will be entirely focused on managing and modernising client-owned infrastructures. It will leverage its expertise to offer hosting and network services, services management, infrastructure modernisation, and migrating and managing multi-cloud environments.
“NewCo will also have greater freedom to forge partnerships and alliances in the managed infrastructure services space. This will open new avenues for growth,” says Krishna in a blogpost.
Transaction details
According to IBM, the proposed separation is expected to be effected through a pro-rata spin-off to IBM shareowners that will be tax-free for U.S. federal income tax purposes. The transaction is subject to customary closing conditions, including Form 10 registration with the U.S. Securities and Exchange Commission, receipt of a tax opinion from counsel, and final approval by IBM’s Board of Directors. The separation is currently expected to be completed by the end of 2021.
“Following separation, the companies together are initially expected to pay a combined quarterly dividend that is no less than IBM’s pre-spin dividend per share. Following the completion of the separation, each company’s dividend policy will be determined by its respective Board of Directors,” says the company.
As two independent companies, IBM and NewCo will capitalise on their respective strengths. IBM will accelerate clients’ digital transformation journeys, and NewCo will accelerate clients’ infrastructure modernisation efforts. “This focus will result in greater value, increased innovation, and faster execution for our clients,” says Rometty.
Along with this announcement, the company also shared the preliminary financial results for the third quarter ended on September 30, 2020. IBM expects to report revenue of $17.6B (approx €14.4B), GAAP diluted earnings per share from continuing operations of $1.89 (approx €1.60) and operating (non-GAAP) earnings per share of $2.58 (approx €2.19).
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