Daily Management Review

109-Year Old IBM Finally Decides To Split To Focus On Cloud Business


109-Year Old IBM Finally Decides To Split To Focus On Cloud Business
After functioning for 109 years, International Business Machines Corp – better known as IBM across the world, has decided to split up into two separate companies. Analysts say that this is the result of years-long effort of the company, which is credited to be the first big computing firm of the world, to diversify away from its legacy businesses and instead focus more on cloud computing which offers much high profit margins.
By the end 202, its IT infrastructure services unit will be listed at a stock exchange as a separate company with a new name altogether. This business deals with providing technical support to more than 4,600 clients of the unit in 115 countries and currently has a payment backlog of $60 billion.
IBM Chief Financial Officer James Kavanaugh told the media that there will be about 90,000 employees in the new company while IBM will take a few months to finally decide on the leadership structure of the new entity.
The company expects to record almost $5 billion in expenses associated with the separation and operational changes planned, said IBM, which currently has more than 352,000 workers globally.
The shares of the company rose by 7 per cent as the surprise move by the company was cheered by its investors. Analysts looked at his move by IBM to be part of the strategy of its Chief Executive Officer Arvind Krishna who was instrumental in last year’s acquisition of cloud company Red Hat for a deal worth $34 billion.
“We divested networking back in the ‘90s, we divested PCs back in the 2000s, we divested semiconductors about five years ago because all of them didn’t necessarily play into the integrated value proposition,” Krishna said on a call with analysts.
The latest move by the company was described as a “significant shift” in the 109-year-old company’s business model, Krishna in a blog.
“IBM is essentially getting rid of a shrinking, low-margin operation given the cannibalizing impact of automation and cloud, masking stronger growth for the rest of the operation,” Wedbush Securities analyst Moshe Katri said.
In recent years, IBM’s software sales have been slowing along with the seasonal demand for its mainframe servers have hit the company’s bottom line. Now the company wants on open hybrid cloud and AI solutions that the company expects would make up more than half of its recurring revenues, IBM said.
After separation, the majority of company revenue would be accounted for by IBM’s software and solutions portfolio, said Krishna, who replaced Ginni Rometty as CEO in April.
The company also said it expects third-quarter revenue of $17.6 billion and an adjusted profit per share of $2.58, roughly in line with Street estimates.