While the NewCo must hold on to a lot of the debt, it would not be fair for the remaining hybrid cloud IBM to go with very low debt, considering the Red Hat buyout and considering its dozens of smaller mergers. IBM even carried $72.1 billion in goodwill and other intangible assets as of June 30. That is nearly half of the value of all IBM’s $154.2 billion in assets.
Will Growth Be Interrupted?
IBM’s revenue shrinkage over time has been hard to ignore. The services shrinkage has been very evident, but will this restructuring and the aftermath of the COVID-19 recession strain an already difficult situation? Refinitiv already was calling for revenue to contract 4% to $74 billion in 2020 as is, and the consensus was looking for less than 2% growth to $75.2 billion in 2021 revenues. With 2019 revenues at $77.1 billion, IBM’s total revenues held basically flat with $79 billion-plus reports from 2016 through 2018.
Backing out Red Hat’s old revenues makes the scenario at IBM look more painful. Red Hat’s total 2018 revenue (ending February 28, 2019) was $3.4 billion. Red Hat’s standalone report at that time listed year-end deferred revenue as $3.0 billion, with a total backlog of more than $4.1 billion.
Despite all the opportunities for growth, all the strategic imperatives combined just could not escape the event horizon of the perpetual shrinkage taking place in NewCo’s services operation.
Will IBM Be Ejected From the Dow?
IBM is now among the older Dow Jones industrial average members. The company became a Dow stock in 1979, and now many other technology companies are in the Dow. As a result of Apple’s recent stock split greatly lowering the top stock’s weighting in the price-weighted Dow index, Salesforce.com was added to the Dow.
It seems that carving up IBM’s NewCo services revenues and its hybrid cloud and strategic imperatives into a standalone entity should probably make IBM “less of a Dow stock.” The NewCo may continue shrinking, and the people who vote on future index members would rather move companies with better growth prospects and better trends in as replacements. Does this leave the door open for Amazon, Google, Facebook or other major technology giants to replace IBM in the Dow?
The end result here may look great for IBM, once the separation is closer to completion. IBM has a history of execution issues over time, and it is now under new leadership. Ginni Rometty and those in the new CEO and president roles will have their hands full. Breaking up is never easy, and this will be a disruptive and painful process for many of IBM’s long-term employees and for many of the people who have come in from acquisitions alike.