After more than a century, IBM stated in October 2020 that it would split itself into two public companies. IBM’s IT infrastructure services unit will be listed as a separate company under a new name by the end of 2021. According to The Wall Street Journal, IBM had $77.15 billion in revenue in 2019, and the operations it will spin off into a separate entity generated about $19 billion in sales over the last year.

The breakup of any large company is bound to make headlines, but industry observers have noted that there were two IBMs on paper back in 2014. However, some suggested that a breakup of IBM would accomplish little. Reg Harbeck, enterprise-wide program officer at SHARE, said, “Throughout its long history, IBM has been famous for the definitive risks they have taken, including their 1964 ‘bet your company’ investment of $5 billion (back then) for the development and delivery of the original System/360 mainframe. At the time, CEO Thomas J. Watson Jr. considered the business case and decided it was too important of an opportunity to miss.” Under current CEO Arvind Krishna, things have changed, particularly given IBM’s acquisition of cloud company Red Hat last year for $34 billion.

“IBM is laser-focused on the $1 trillion hybrid cloud opportunity,” said CEO Arvind Krishna. This is not the first time that IBM has divested assets. He added, “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.”

Harbeck continued, “For those of us who have dealt with IBM for decades, it is clear that this will free up both sides to not be bound by internal policies and procedures that are irrelevant to their core business values.”

IBM plans to leverage its Red Hat acquisition and focus on artificial intelligence and its open hybrid cloud platform, which the company considers a $1 trillion market opportunity as adoption of the platform accelerates.

The new company, however, will focus on designing, running, and modernizing the mainframes and the infrastructure of many organizations. The aim is to leverage its relationships with more than 4,600 technology-intensive, highly regulated clients in 115 countries to help manage and modernize those clients’ infrastructures, which IBM says is a $500 billion market opportunity. According to a CRN article, in addition to Red Hat and Global Business Services, IBM will retain its systems business, software portfolio, and mission-critical public cloud service. This will include their IBM Z mainframes and related hardware and software.

Moshe Katri with Wedbush Securities told Reuters, “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.” Meanwhile, ArsTechnica reported that IBM’s stock was up 7% after the breakup announcement.

Costs vs. Benefits

After 29 quarters of year-over-year declining revenue in the last decade, IBM hopes it can reverse the trend. But, spinning off a separate company will take a year or more, and it could cost about $2.5 billion. Boyar Research’s study of 246 spinoffs in 2019 found that in many cases the outcome was disappointing for the parent company after the first year. After five years, just over a third were performing better than the S&P 500 index. Erik Gordon, a professor at the University of Michigan’s Stephen M. Ross School of Business, said to The Wall Street Journal that, like other IBM exits, this one happened too slowly and is too late to help the company recapture its past glory.

However, Gartner finds that the IT services sector will rebound in 2021, after a projected 6.8% decline this year.

According to CRN, once the spin-off is completed, IBM will move from No. 1 on the 2020 CRN Solution Provider 500 list of North America’s largest solution providers to No. 2 behind Accenture. The spin-off company will enter the CRN SP500 list at No. 5 behind Accenture, IBM, Tata, and DXC Technology. Martin Wolf, president of martinwolf M&A Advisors, noted that this is “the smartest move IBM has made in 20 years.” Wolf went on to detail that IBM should have gotten rid of all its old legacy units when it bought Red Hat, which reaffirms IBM’s commitment that IBM Z is an important part of IBM’s hybrid cloud offerings.

Bob Venero, CEO of solution provider Future Tech Enterprise, added to CRN that the move lets the managed services infrastructure business stand on its own without having to be dragged down by the systems, software, and product business. “That product business is a lot more volatile and transactional than the service business,” he shared. “This is a more focused approach to the business, which is a smart, long-term play.”

IBM plans to retain the new company as its preferred partner for infrastructure, while the technology support services business will remain an integral part of IBM. Harbeck said, “I think we can look forward to IBM making great leaps into this new frontier.”

In a release from IBM, Krishna explained that services account for more than 60% of IBM’s revenue. When the spinoff is complete, the software and solutions portfolio will account for the majority of IBM’s revenue and it will be a significant shift in IBM’s business model. “The success we’ve had with Red Hat gives us confidence that this is the right move,” he said. The new company can build a more efficient operating model focused on service delivery excellence and spearhead the next generation of transformational managed infrastructure services.

If you’d like to contribute how you and your teams are navigating the pending IBM changes, or to be quoted in a future story, email the SHARE editors at editor@share.org.