IBM preps for 2021 business split as enterprise hybrid cloud push gathers pace

IBM will split its business into two separate, public traded businesses by the end of 2021, with one focused on tapping into the growing demand for hybrid cloud services from enterprises while the other prioritises the delivery of managed infrastructure services.

The tech giant confirmed the move in statement, where it claimed the measure would help “accelerate its hybrid cloud growth strategy”, while also serving to drive up the value these separate entities can deliver to their clients and shareholders overall.

IBM CEO Arvind Krishna said the company is “laser-focused” on tapping into the “$1tn hybrid cloud opportunity” as enterprises accelerate their plans to move to the cloud.

“Client buying needs for application and infrastructure services are diverging, while adoption of our hybrid cloud platform is accelerating,” he said. “Now is the right time to create two market-leading companies focused on what they do best.”

The century-old IBM brand will be retained by the hybrid cloud-focused entity, while the trading name of the other company to be formed as a result of this split is set to be decided – but will be referred to as “NewCo” for now.

“NewCo will have greater agility to design, run and modernise the infrastructure of the world’s most important organisations,” said Krishna. “Both companies will be on an improved growth trajectory with greater ability to partner and capture new opportunities – creating value for clients and shareholders.”

IBM executive chairman Ginni Rometty said splitting the company in two will position Big Blue better for the “new era of hybrid cloud”, which is a process it has been in the throes of for several years now.

As referenced by Rometty, work on this front has markedly accelerated in the wake of IBM’s $34bn acquisition of open source cloud firm Red Hat in 2018, which has enabled the firm to position its off-premise offerings as more open and less proprietary than those of its competitors.

“Our multi-year transformation created the foundation for the open hybrid cloud platform, which we then accelerated with the acquisition of Red Hat,” she said.

“At the same time, our managed infrastructure services business has established itself as the industry leader, with unrivalled expertise in complex and mission-critical infrastructure work.

“As two independent companies, IBM and NewCo will capitalise on their respective strengths,” said Rometty. “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.”

Financial perspective

From a financial perspective, spinning off its managed infrastructure business means IBM will no longer be a company where more than half of its revenue is generated by services, but instead one where the majority of its income is derived from “high-value” cloud software and solutions, the company said in a statement.

“IBM will also have more than 50% of its portfolio in recurring revenues,” the statement continued.

IBM also alludes to a potential streamlining of its business in the future, on the back of this business split, with the company making reference to its plans to “simplify and optimise” its operations geographically and from a go-to-market perspective.

“IBM is also 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 statement added.

It also goes on to claim that, at the time of its formation, NewCo will “immediately” become the “world’s leading managed infrastructure services provider”, with a customer base of more than 4,600 clients across 115 countries, including more than 75% of the Fortune 100.

IBM’s cloud endeavours have been the bright spot in its most recent run of financial results, with the company reporting a 5.4% year-on-year downturn in overall revenue to $18.1bn during its second quarter of 2020, while its cloud business achieved 30% revenue growth to $6.3bn. In response to the news of its proposed business split, IBM’s share price rose 7% .

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