IBM has decided to divide its $19B Managed Infrastructure Services group to create two industry-leading companies, each with a strategic focus to drive client and shareholder value. IBM will separate the Managed Infrastructure Services unit of its Global Technology Services division into a new public company (“NewCo”). This move will accelerate IBM’s hybrid cloud growth strategy and will drive digital transformations for its clients. This spinoff will be tax-free for IBM shareholders, and they will receive separate dividends from the two companies after the move’s completion. It is expected to be completed by 2021.
IBM is planning to focus entirely on hybrid cloud, Artificial Intelligence, and mainframe technologies. The acquisition of Red Hat for $34 billion in 2019 was a significant step for IBM to build its hybrid-cloud platform that supports computing on-premises and in private as well as public cloud environments. This platform deploys AI capabilities. “This was the first major step to seize this opportunity and underpins everything that has followed,” said Arvind Krishna, IBM Chief Executive Officer,.
“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. Hybrid cloud and AI are swiftly becoming the locus of commerce, transactions, and over time, of computing itself. Our decision is also the logical next step in our pursuit of the $1 trillion hybrid-cloud opportunity. Today, services account for more than 60% of our revenue. When NewCo becomes an independent company, our software and solutions portfolio will account for the majority of our revenue,” he further stated.
The newly formed entity of IBM will be the world’s leading managed infrastructure services provider. It will focus on managing and enhancing client-owned infrastructures. The major services will include hosting and network services, services management, infrastructure modernization, and migrating and managing multi-cloud environments.
The value created by NewCo
NewCo will run with a streamlined business model that will help enterprises to improve their performance through AI and automation. NewCo’s services will build agility and efficiency into the infrastructure and datacenters of enterprises. It will also modernize their infrastructure. NewCo will open new avenues for growth and maintain the partnership with IBM to serve existing and new clients. IBM will also undergo a transition in its revenue source. While more than half of its revenue comes from services currently, it will change to more than 50% of sales coming from recurring revenue.
“We are creating two companies focused on what they do best. We will create value through focus.” said Krishna about this strategic move by IBM.