IBM shares rose 6% after the announcement on the allocation of units Managed Infrastructure Services into a separate company NewCo to focus on the development of hybrid cloud market opportunity of $1 trillion.
On Thursday, International Business Machines (IBM) announced that it plans to allocate his unit Managed Infrastructure Services segment, Global Technology Services into a new public company.
Commenting on the split, IBM Redbook, called yesterday “a momentous for the company,” which “determines the future of IBM”.
It is expected that the separation will be implemented in the form of a tax-free separation for the shareholders of IBM and will be completed by the end of 2021.
New leadership at IBM is clearly committed to the transformation of the company and the desire of competition in the market of hybrid cloud computing with Amazon (AMZN) and Microsoft (MSFT). Like Oracle (ORCL), which is trying to move to the cloud computing business, IBM has its own way of development of its cloud infrastructure and services.
Highlighting the division of Managed Infrastructure Services, IBM aims to highlight the promising business of providing services hybrid cloud architectures and artificial intelligence technologies from legacy services to manage IT infrastructures. Global Technology Services is the technical support unit and unlike cloud-based IBM business demonstrating strong growth over the past 2 years, in contrast, shows a decrease in income.
“IBM is focused on the possibility of creating a hybrid cloud cost $1 trillion.”, – said General Director of IBM’s Arvind Krishna. “Customers’ needs in purchase applications and infrastructure services differ, and the introduction of our hybrid cloud platform is accelerating … Now is the right time to create two market-leading companies focused on what they do best.”
The new company will be called NewCo and will provide hosting services and network infrastructure upgrades and migration services to the cloud.
According to the manual IBM: “NewCo will have greater flexibility in the design, operation and modernization of infrastructure the most important organizations of the world.”
The decision to focus on cloud computing and hybrid cloud architecture is the result of long and large-scale restructuring of IBM. Over the past eight years, IBM has invested more than $120 billion in restructuring, including the largest acquisition of the company Red Hat in 2018 for $34 billion Company Red Hat, dealing with the development of cloud-based software with open source code, in the second quarter of this year showed a 17% increase in revenues to $5.75 billion, slightly exceeding analyst estimates. Total revenue of IBM cloud segment grew by 30% to $6.3 billion.
Income of the technical support unit Global Technology Services refers to the future a separate company in the second quarter, by contrast, decreased by 8% compared to last year to $6,32 billion because of the decline in the area of application management and consulting.
In its press release, IBM said: “the New company NewCo will immediately become the world’s leading provider of managed infrastructure. With over 4600 clients among high-tech companies in 115 countries, including more than 75% of the Fortune 100. NewCo has an orders portfolio of $60 billion, more than twice the scale of its nearest competitor. The new company will be entirely focused on the management and modernization of the infrastructure owned by the customers, which opens up a market opportunity of $500 billion.”
According to James Cortada, decade worked for IBM and wrote a book about this company, the selection “actually takes over 50% of the business and makes it stand out as a separate company”. “Division into two parts will facilitate the prosperity of each company, based on its own characteristics.”
This shift will also help resolve a long-standing rivalry between the new, fast-growing part of IBM, and old.
Analysts also welcomed the move by IBM.
“IBM struggled during this last four or five years,” said an analyst at Wedbush Securities Inc. Moshe Katri. “It’s something that is long overdue, and I think Arvind [CEO of IBM] is doing the right decisions.”
According to analyst Bloomberg Intelligence Anurag Rana, a great legacy IBM in the area of IT products has become an impediment for growth.
“Unloading of enterprises with a low growth rate can uncover the true value of Red Hat, which, according to our estimates, is more than $50 billion,” he said, adding that this additional income is “exciting news for IBM”.
The IBM forecast for the third fiscal quarter
IBM also provided preliminary financial results for the third quarter. The company said it expects to receive revenues of $17.6 billion and earnings per share of $2,58, which corresponds to the estimates of wall street. It is expected that IBM will publish the report on October 21.