Blue giant IBM said it would spin off its infrastructure hosting services division to become a new public company, a move that will allow it to focus on hybrid cloud businesses including Red Hat. The new company, which will be tax-exempt to shareholders, will focus on managing data centers and cloud infrastructure for customers.
IBM said it would report better-than-expected third-quarter sales. IBM said third-quarter earnings per share were $2.58 and revenue was $17.6 billion, in non-GAAP terms.
Wall Street had expected third-quarter non-GAAP earnings per share of $2.58 and revenue of $17.54 billion. The news sent IBM’s shares up 10 percent.
Since the split won’t be completed until 2021, there are a lot of details yet to be worked out, but IBM’s top-level plan looks like it needs five steps:
As a first step, the infrastructure managed services division, which was originally part of IBM’s global technical services division, will be stripped tax-free;
The second step is to design, operate, and modernize the new company after the split;
In the third step, IBM will focus on cloud platforms led by Red Hat and growth markets such as artificial intelligence and hybrid cloud;
In the fourth step, IBM will simplify its operating model, consolidate shared services, and streamline without infrastructure-hosted services;
“In the fifth step, when the new company for infrastructure managed services is split up, IBM will transform it from a company with half of its total revenue to a company with more than 50 per cent of recurring revenue.”
Arvind Krishna, chief executive of IBM, an Indian-born company, said, “The popularity of our hybrid cloud platform is accelerating at a time when customer demand for application and infrastructure services is changing. “
Krishna said on a conference call that the spin-off company redefined IBM. “I’m focused on growth first and winning the architecture battle in cloud computing with Red Hat,” he says. “
“Our actions will drive our hybrid cloud growth strategy,” he said. “
IBM will bring in about $59 billion in revenue when the new company splits, while the new company will achieve $19 billion in sales.
Eventually, IBM will spin off the managed infrastructure company to become a platform company with its own economic advantages.
Details of the new company.
The spin-off will have more than 4,600 highly regulated customers in 115 countries and territories, according to a person familiar with the matter who spoke on condition of anonymity, according tomedia reports. The new company will also have 90,000 employees.
IBM says the spin-off Infrastructure Hosting Services will have more than 75 percent of its Fortune 100 companies as its customers and receive a $60 billion backlog of orders.
IBM says the split infrastructure hosting services company will be able to move faster to modernize the infrastructure and work with all cloud vendors. The new company will also become a partner of IBM.
When the split is completed, the two companies will together pay ibm shareholders no less than their current level of dividends. That’s what IBM and the new company will look like after the split.