Why IBM Is Spinning Off Its Infrastructure Services Business

Touting a total market opportunity of $1 trillion, International Business Machines Corp. (NYSE: IBM) on Thursday announced that it will spin off its managed infrastructure services business into a new company (called NewCo for now) and remain “laser-focused” on the trillion-dollar hybrid cloud market. The spin-off, which the company expects to complete by the end of next year, will be tax-free to IBM shareholders.

IBM’s $34.8 billion acquisition of open hybrid cloud firm Red Hat was engineered by then-CEO Ginni Rometty, now IBM’s executive chairperson. Commenting on the spin-off, Rometty said, “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.”

CEO Arvind Krishna added that IBM would focus on its open hybrid cloud platform and AI capabilities, while NewCo “will have greater agility to design, run and modernize the infrastructure of the world’s most important organizations.”

NewCo’s infrastructure market opportunity is pegged at $500 billion and will include more than 4,600 clients in 115 countries, including more than 75 of the Fortune 100. The new company will begin its life with an order backlog of some $60 billion and more than twice the scale of its nearest competitor, according to the announcement. NewCo also will take with it about 90,000 employees of IBM’s current 352,000-strong workforce and annual revenue of around $19 billion.

Interestingly, perhaps, NewCo will not include IBM’s server business. The company apparently can’t quite bring itself to part with all its hardware business. The managed infrastructure services business includes testing and assembly, product engineering and lab services.

The company is raising its bet, but not going all-in, on its open hybrid cloud business. While the infrastructure services business is healthy, IBM is signaling that it does not see big growth ahead. As more companies outsource their infrastructure and cloud services needs, IBM is wagering that the software application part of the business will grow faster.

IBM also announced that it expects to report third-quarter revenue of $17.6 billion, diluted earnings per share (EPS) from continuing operations of $1.89, and adjusted EPS of $2.58. Analysts are forecasting third-quarter adjusted EPS of $2.58 and revenue of $17.5 billion.

Shares traded up about 7.4% early Thursday morning, at $133.26 in a 52-week range of $90.56 to $158.75. The consensus price target on the stock is $135.19. IBM pays a dividend yield of 5.35%.

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