Announcing a major industry spin-off, Arvind Krishna, IBM’s Chief Executive Officer said his company is laser-focused on the $1 trillion hybrid-cloud opportunity that lays ahead in the future.
In the greatest ever business divestment, IBM has announced that it will accelerate and also focus on its hybrid cloud growth strategy to drive digital transformations for its clients by breaking off a $19 billion chunk of its business.
The 109-year-old tech company said it is spinning off its managed infrastructure services unit of its Global Technology Services division into a new public company, temporarily named NewCo. The separation is expected to take effect by late 2021.
This move by the tech giant is expected to create two industry-leading companies, each with a strategic focus and flexibility to drive client and shareholder value.
The separation is expected to be achieved as a tax-free spin-off to IBM shareholders.
While informing this major decision, Arvind Krishna said that client buying needs for application and infrastructure services are diverging, while the adoption of hybrid cloud platform is accelerating. His company felt it is the right time to create two market-leading companies focused on what they do best.
“IBM will focus on its open hybrid cloud platform and AI capabilities. NewCo will have greater agility to design, run, and modernize the infrastructure of the world’s most important organizations. Both companies will be on an improved growth trajectory with greater ability to partner and capture new opportunities – creating value for clients and shareholders, said Krishna.”
“We have positioned IBM for the new era of hybrid cloud,” said Ginni Rometty, IBM Executive Chairman. “Our multi-year transformation created the foundation for the open hybrid cloud platform, which we then accelerated with the acquisition of Red Hat. At the same time, our managed infrastructure services business has established itself as the industry leader, with unrivaled expertise in complex and mission-critical infrastructure work. As two independent companies, IBM and NewCo will capitalize on their respective strengths. IBM will accelerate clients’ digital transformation journeys, and NewCo will accelerate clients’ infrastructure modernization efforts. This focus will result in greater value, increased innovation, and faster execution for our clients.”
IBM, a Leading Hybrid Cloud and AI Company
IBM will focus on its open hybrid cloud platform, which represents a $1 trillion market opportunity. Building on IBM’s hybrid cloud foundation, the company acquired Red Hat to unlock the full value of the cloud for clients, further accelerating the adoption of the platform.
With tighter integration and focus on its open hybrid cloud and AI solutions, IBM says it will move from a company with more than half of its revenues in services to one with a majority in high-value cloud software and solutions. IBM will also have more than 50% of its portfolio in recurring revenues.
As part of this strategic acceleration, IBM, in its press statement, indicated that it is taking action to simplify and optimize its operating model for speed and growth. This includes streamlining its geographic model and transforming its go-to-market structure to better engage with and support clients.
IBM says it 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.
NewCo, the Leading Managed Infrastructure Services Company
The new company (to be named at a subsequent date) will immediately be the world’s leading managed infrastructure services provider.
It has relationships with more than 4,600 technology-intensive, highly regulated clients in 115 countries, including more than 75% of the Fortune 100, a backlog of $60 billion, and more than twice the scale of its nearest competitor.
The new company will be entirely focused on managing and modernizing client-owned infrastructures, which is a $500 billion market opportunity.
IBM says it will leverage its expertise to offer hosting and network services, services management, infrastructure modernization, and migrating and managing multi-cloud environments. These are critical services that are core to client operations.
NewCo will also be able to partner fully across all cloud vendors, opening new avenues for growth, while maintaining a strong strategic partnership with IBM and continuing to serve existing and new clients.
Separation Transaction Details
The proposed separation is expected to be effected through a pro-rata spin-off to IBM shareowners that will be tax-free for U.S. federal income tax purposes. The transaction is subject to customary closing conditions, including Form 10 registration with the U.S. Securities and Exchange Commission, receipt of a tax opinion from counsel, and final approval by IBM’s Board of Directors. The separation is currently expected to be completed by the end of 2021.
Following separation, the companies together are initially expected to pay a combined quarterly dividend that is no less than IBM’s pre-spin dividend per share. Following the completion of the separation, each company’s dividend policy will be determined by its respective Board of Directors.
One-time transaction costs are expected to include tax charges, operational separation activities, and other customary items.
J.P. Morgan Securities LLC and Lazard are serving as financial advisors for the transaction, with Paul, Weiss, Rifkind, Wharton & Garrison LLP acting as legal advisor.