(Reuters) – International Business Machines Corp
is splitting itself into two public companies, capping a years-long effort by the world’s first big computing firm to diversify away from its legacy businesses to focus on high-margin cloud computing.
IBM will list its IT infrastructure services unit, which provides technical support for 4,600 clients in 115 countries and has a backlog of $60 billion, as a separate company with a new name by the end of 2021.
The new company will have 90,000 employees and its leadership structure will be decided in a few months, Chief Financial Officer James Kavanaugh told Reuters.
IBM, which currently has more than 352,000 workers, said it expects to record nearly $5 billion in expenses related to the separation and operational changes.
Investors cheered the surprise move by Chief Executive Officer Arvind Krishna, the key architect behind IBM’s $34 billion acquisition of cloud company Red Hat last year, sending the company’s shares up 7%.
“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.
In a blog, Krishna called the move a “significant shift” in the 109-year-old company’s business model.
“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.
IBM, which has sought to make up for slowing software sales and seasonal demand for its mainframe servers, said it would now focus on open hybrid cloud and AI solutions that will account for more than half of its recurring revenues.
Krishna, who replaced Ginni Rometty as CEO in April, said IBM’s software and
IBM, throughout its 109-year history, hasn’t often led technology trends. But it has adapted and eventually prospered time and again.
It is trying to go the adaptation route once again.
IBM on Thursday acknowledged the challenge and embraced the opportunity for the company in the accelerating shift to cloud computing. The company said it was spinning off its legacy technology services business to focus on cloud computing and artificial intelligence.
Arvind Krishna, who became chief executive this year, called the move “a landmark day” for IBM, “redefining the company.”
The split-up strategy reflects how decisively computing has shifted to the cloud. Today, nearly all new software is being created as a cloud service, delivered over the internet from remote data centers. The computing model affords corporate customers more flexibility and cost savings, sold as a pay-for-use service or annual subscriptions.
IBM was late to the cloud market, which was pioneered by Amazon when it began Amazon Web Services in 2006. But IBM in recent years has made a major push into cloud services and software, punctuated by its $34 billion purchase in 2018 of Red Hat, a distributor of open-source software and tools used by cloud developers.
In an interview, Ginni Rometty, IBM’s executive chair and former chief executive, said cloud computing, enhanced by artificial intelligence, “is now IBM’s enduring platform.”
IBM is tailoring its cloud strategy to help corporate customers make the transition to the new technology and thus carve out a fast-growing and healthy business amid the market leaders: Amazon Web Services, Microsoft and Google.
The main business, retaining the IBM name, will be its cloud operations, along with its hardware, software and consulting services units. They represent about three quarters of IBM’s revenue.
The business to be spun off, which is not yet named, is IBM’s basic
Back in 1954, Lourie was a technical editor, playing clarinet in a Boston-area ensemble, when the pianist, an MIT chemist, hired her to process data on punch paper tape.
“It was a pretty rote job,” said Lourie, now 90, over Zoom from her home in Arlington, Vt. The chemist published a paper on the project, and in a footnote mentioned Lourie as a contributor.
“It felt wonderful,” she said. She was off and running.
She speaks humbly about her work in computers, as if her path unfolded purely by luck and circumstance. In 1957, IBM hired her, and she moved to New York, where she devised a program implementing a new computer language, LISP, developed by John McCarthy at MIT. The research helped lay the groundwork for GPS and artificial intelligence.
“It’s a way to start at the top and finger your way through and encompass every point in the tree,” she said. “I fell in love with the ability to trace trees.”
Lourie published her own paper on the project. That’s when IBM gave her carte blanche. There weren’t many women in computer science, and the field was burgeoning.
“I was allowed to name my own project,” she said, and points to computer pioneer Grace Hopper as “leading the way.”
“There was no resistance to women’s employment or advancement in those days,” Lourie said.
It was 1964. Lourie had been a weaver since she was 7, growing up in Chelsea, making rugs for her dollhouse on a loom her father built. Now, weaving gave her an idea.
The Jacquard loom, invented in 1804, runs on punch cards. It inspired 19th-century computational coding,
International Business Machines Corp. (IBM) – Get Report shares jumped higher Thursday after the cloud-focused computer group said it would spin off its infrastructure division.
IBM said it will sell its ‘managed infrastructure services unit’, a legacy division that sits within the group’s global technology services group. The move will help concentrate IBM’s focus on hybrid cloud growth, the company said, which have been driving group earnings under new CEO Arvind Krishna.
IBM said the separation, a tax-free spin-off to IBM shareholders, will likely be completed by the end of next year.
“IBM is laser-focused on the $1 trillion hybrid cloud opportunity. Client buying needs for application and infrastructure services are diverging, while adoption of our hybrid cloud platform is accelerating,” Krishna said. “Now 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,” he added.
IBM shares were marked 7.5% higher in early trading following news of the division sale to change hands at $133.62 each, the highest since early June.
IBM’s second quarter cloud revenues rose 30% to $6.3 billion. as well as solid sales from its cloud and cognitive software division, following a re-focus of business operations and reporting strucures announced last year.
Free cash flow generation also impressed, growing 15% year-on-year and snapping several quarters of decline under the previous executive team, while margins and cash collections improved.