In the early years after we launched it in 2014, IBM was a core holding in the BizNews share portfolio. But when Warren Buffett sold what was a major holding in early 2018, we followed suit. As the graph below comparing IBM with the S&P500 index shows, it was a smart move as the stock has massively underperformed. But it may be time to reconsider. The factors which initially drew us in (powerful market connections; strong focus on growth sectors) remain intact. Last night IBM announced it will be honing its focus on AI and cloud computing by unbundling much of its legacy business, roughly a quarter of the group. – Alec Hogg
IBM to spin off services unit to accelerate cloud computing pivotÂ
By Asa Finch and Dave Sebastian
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Shedding a legacy business that is performing poorly at a time when IBM’s clients are adopting cloud computing is probably a wise bet, said Daniel Elman, an analyst at Boston-based Nucleus Research. “They were late to the cloud party, and this is now them doubling down and saying this is the direction of the company,” he said.
IBM signaled its focus on the cloud with the appointment of Mr. Krishna as CEO after his predecessor Ginni Rometty—now executive chairman—struggled to inject growth. Mr. Krishna ran the company’s cloud and cognitive-software division. IBM also named Jim Whitehurst—CEO of Red Hat, the open-source software giant that IBM acquired for about U$33 billion last year—as its president, the first time in decades it has given an executive that singular title.
IBM has been trying to capitalize on what it calls the hybrid cloud, which companies use to manage software and other systems across different cloud services and their own data centers. IBM saw the deal for Red Hat, which was the most expensive in its history, as an opportunity to gain on competitors in cloud computing.
The technology-services division that encompasses the unit to be spun off has been a headache for IBM for a while. Sales in the entire services division fell 6.1% last year, though it remained IBM’s largest by revenue at roughly U$27.4 billion—or about 35% of the company’s total.
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In April the company recorded a U$900 million charge against earnings, largely to cover restructuring costs linked to the services division. The company in January had signaled it was planning changes at the unit to bolster its competitiveness.
Mr. Krishna said the business being spun off, though lower margin, would have an investment-grade credit rating and also growth opportunities. It would go up against rivals such as DXC Technology Co. and a broad array of more regionally focused tech-services businesses, some of which could provide partnering opportunities.
IBM said Thursday the yet-to-be-named company already has relationships with 4,600 clients in 115 countries and operates in what it sees as a U$500 billion market. The new company would be able to partner across all cloud vendors, providing the opportunity for stronger profits and cash generation, IBM said. The separation is expected to be completed by the end of 2021.
IBM opted for a spinoff to have certainty over the timing of the separation and provide customers certainty over what would transpire. Mr. Krishna said the company would be open to an acquisition offer for the businesses as long as it didn’t jeopardize those criteria.
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In connection with its plans Mr. Krishna said IBM expects to record U$2.3 billion in accounting charges by the end of the year.
The company Thursday also reported third-quarter profit and revenue that were roughly in line with Wall Street’s expectations. For the September-ended quarter, IBM posted preliminary earnings from continuing operations of U$1.89 a share, or U$2.58 a share on an adjusted basis, on revenue of U$17.6 billion. The company said it would release its full quarterly report later this month.
Mr. Krishna said IBM remained committed to a sustainable and growing dividend.
Write to Asa Fitch at [email protected] and Dave Sebastian at [email protected]
