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IBM will spin off legacy business to focus on cloud and AI services

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IBM’s legacy IT infrastructure work will be spun out

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IBM is splitting into two public companies, with a spin-off handling the firm’s legacy IT infrastructure work, allowing IBM to focus on new high-margin businesses, particularly cloud services and AI.

The 109-year-old company announced the news this week, which follows CEO Arvind Krishna’s longterm plan to streamline the sprawling business. Krishna took the reins of IBM in April 2020 after working on its $34 billion acquisition of open source software firm Red Hat from 2018 onwards. Red Hat’s software is key to IBM’s new hybrid cloud offerings.

In a call with analysts, Krishna presented the split as the latest in a long line of divestments by IBM, as the company has sought to find more profitable ground throughout its long history. “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,” said Krishna, according to a report from Reuters.

The new company — which has the placeholder name “NewCo” in official documents — will have roughly 90,000 employees and $19 billion in revenue. (IBM as it current stands has roughly 352,000 workers.) When the spin-off is completed, which IBM says will take place before the end of 2021, NewCo will automatically become the world’s “leading managed infrastructure services provider,” with a client list of some 4,600 customers that covers more than 75 percent of the Fortune 100.

IBM will be split into IBM and NewCo by the end of 2021.
Image: IBM

The new IBM will be mostly focused on its hybrid cloud platform, which the firm says represents a $1 trillion market opportunity. Right now, the cloud market is dominated by Amazon and Microsoft, but continues to see strong growth, particularly as the global pandemic encourages remote work.

“With tighter integration and focus on its open hybrid cloud and AI solutions, IBM will move from a company with more than half of its revenues in services to one with a majority in high-value cloud software and solutions,” said IBM in a press release.

Speaking to Reuters, market analyst Moshe Katri of Wedbush Securities said the split was a smart move. “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,” said Katri.