Layoffs, Consolidations and Charges
It is too soon to know what actions IBM will formally endure during this process. The press release noted that IBM will take action to simplify and optimize its operating model for speed and growth. Specifically, streamlining its geographic model, transforming its go-to-market structure and continuing to consolidate its shared services. The goal is to have “an enhanced financial profile with a clear trajectory for improved revenue and profit growth.”
These are buzzwords for layoffs (see below), office closures, eliminating or reducing lower margin projects and so on. All this comes with charges and disruption, even if it is a move to get ahead down the road. Those charges have been estimated further in this article.
A Long Separation Timeline and Lessons of HP
Holders of the existing IBM are going to own two companies as the deal stands today. It is always possible a buyer might come into play, but it is no secret the services has been in contraction for some time. IBM’s release indicated that the separation would end up as a tax-free spin-off to its shareholders, but it also gave the forecast that the deal would be completed by the end of 2021.
Hewlett-Packard said at roughly the same time of the year in 2014 that it planned to split into two companies, and now there are Hewlett Packard Enterprise Co. (NYSE: HPE) for servers and enterprise services and HP Inc. (NYSE: HPQ) for personal computers, printers and related products. HP lost thousands of jobs over the course of that restructuring. HP acquired Compaq in a deal worth $25 billion or so nearly two decades ago, and the deal was frequently touted as a bad transaction that did not add what was hoped.
Will IBM Have Difficult Earnings Ahead?
IBM did offer preliminary guidance with its split-up announcement. The company now sees revenue of $17.6 billion, with adjusted earnings of $2.58 per share and with GAAP earnings of $1.89 per share. While those figures are preliminary and may be subject to change, Refinitiv had estimates at $17.54 billion in revenues and $2.58 in adjusted operating earnings per share.
As the IT service operation has shrunk over time, does this mean that even IBM’s hybrid cloud and strategic imperatives are seeing sluggish growth now too? And what will this do IBM’s continual dividend growth?
How to Divvy Up the Cash, Debt and Goodwill
IBM still manages to generate massive cash, but the post-Red Hat merger has left it with a mountain of debt that must be properly divided. IBM’s long-term debt was $35.6 billion at the end of 2018, but it was $58.0 billion by the end of 2019 and was $59.1 billion as of June 30, 2020.
As of June 30, 2020, IBM had $14.3 billion of cash on hand, including its marketable securities. The company’s total debt, including its global financing debt of $21.9 billion, was listed as $64.7 billion at the time.
Standard & Poor’s immediately affirmed IBM’s A credit rating on this news and telegraphed that IBM will incur cash restructuring costs of roughly $900 million in 2020, followed by roughly $2.3 billion in 2021. S&P also sees one-time cash charges of about $1.5 billion related to the spin-off during the second half of 2021. While that is still investment grade, S&P has a negative outlook on that rating.