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IBM to spin off IT services to focus on hybrid cloud, AI

IBM will spin off its Managed Infrastructure Services unit as a public company to focus on hybrid cloud and AI.

IBM plans to spin off the managed infrastructure portion of its Global Technology Services business into a new public company in a move that it said will help reverse years of declining revenue and serve customers more effectively.

The spinoff to IBM shareholders, which represents $19 billion in revenue, is expected to be completed by the end of 2021.

IBM plans to focus on hybrid cloud computing through its Red Hat OpenShift platform, as well as AI. The new company, dubbed NewCo for now, will offer hosting, project services, infrastructure modernization and multi-cloud management and migrations.

IBM's Managed Infrastructure Services unit within Global Technology Services offers a range of IT services largely based around legacy infrastructure and digital transformation, such as testing and assembly, but also includes product engineering and lab services.

However, NewCo will have "full autonomy when it comes to adapting its go-to-market strategy," IBM CEO Arvind Krishna said on a conference call Thursday.

Meanwhile, IBM sees a roughly $1 trillion market opportunity for hybrid cloud, 60% of that coming from highly regulated businesses, Krishna said. He broke down the $1 trillion as $300 billion in cloud migration services, $450 billion in cloud software and platforms, and $230 billion in cloud infrastructure.

While the spinoff may be a major strategic shift for IBM, which is long known for bundling hardware, software and services, it's not without precedent, Krishna said.

IBM CEO Arvind KrishnaArvind Krishna

"Many people forget we divested networking in the 1990s, PCs in the 2000s, and semiconductors about five years ago," he said. "All of them didn't play into the integrated model and clients could get them from other places without losing any value."

The new IBM will remain committed to an integrated business model, he added. "We're still providing infrastructure, software and services against the portfolio that is important to us, which is hybrid cloud and AI."

Analysts mixed on Big Blue's big change

Some analysts see the split benefiting both IBM and NewCo. They believe each party will be able to focus more sharply on new marketing opportunities and will prove to be a more efficient use of manpower.

"They can have dedicated teams working on each side of the business rather than trying to split the manpower between the two," said Daniel Elman, research manager at Nucleus Research.

The IBM spinoff may also give each company more freedom to pursue growth through acquisitions, particularly NewCo.

"I wouldn't be surprised if [NewCo] snaps up some smaller AI or cloud computing startups that are still in their growth phase. It could help IBM cut some corners," he said.

The split is not expected to take effect until late 2021. When it does, IBM, now on track to be roughly a $75 billion company for fiscal 2020, would have revenue hovering near $55 billion.

Big Blue would be something closer to Medium Blue compared to rivals such as AWS, Microsoft and Dell. While the financial optics might appear bad to some, given IBM's once formidable market presence, Elman thinks most corporate users would look past that and understand the reasons for the move.

Charles King, president and principal analyst, Pund-ITCharles King

"On the surface it doesn't look great," Elman said. "But if users look a little deeper and understand what is going on it the market now, I think many will see that strategically it can work out as a smart play," he said.

Wall Street agreed, with IBM's shares up more than 5% as of press time.

Still, for existing IBM customers, not much should change, according to Charles King, principal analyst at Pund-IT.

"IBM and NewCo will have thousands of common customers and those organizations aren't likely to be greatly impacted or experience major changes beyond branding and invoicing," he said.

But there is a clear opportunity for NewCo to innovate in ways that benefit its bottom line, as well as customers, said Ted Schadler, VP and principal analyst at Forrester Research.

Ted Schadler, VP and principal analyst, ForresterTed Schadler

"Infrastructure services has been a declining-margin business for years. It's driven off a 'we'll run your mess for less' value proposition for CIOs seeking to get out of the infrastructure management business," Schadler said. "Truth is, there are big opportunities here to use automation and cloud migration to streamline the costs and capital requirements for infrastructure, so NewCo can also pursue an interesting growth path."

Krishna, who succeeded Ginni Rometty as IBM CEO in April, made it clear his priority was to reverse IBM's years of declining sales.

"That means he has to streamline the business to focus on those application and digital business transformation opportunities, while letting other parts of the business free to pursue their own growth and profit paths," Schadler said. "Almost half of the technology spend in the enterprise, and a much bigger percentage of the business-differentiating applications are in business, operations, marketing and product budgets."

Infrastructure services has been a declining-margin business for years. It's driven off a 'we'll run your mess for less' value proposition for CIOs.
Ted SchadlerVP and principal analyst, Forrester

IBM will be better prepared to help these buyers with AI, hybrid cloud and new business platforms, he added.

NewCo, however, has its own challenges ahead, said Bill Martorelli, an analyst at Forrester.

"I was thinking whether this move artificially separates what might otherwise go better together, such as the infrastructure and applications towers that should be converging," he said. "But as a practical matter, it makes little difference. For these big services firms like IBM, it is already like working with two more different companies, because they have different groups for their infrastructure and applications groups.

"I hope [NewCo] takes the opportunity with a clean slate to improve the customer experience on the infrastructure services side, which has been a concern for many customers across multiple suppliers," Martorelli added.

Separately, IBM also updated its guidance for the third quarter, which it will officially report later this month. The company expects revenues of $17.6 billion, compared with $18 billion in last year's third quarter. In this year's second quarter the company reported revenues of $18.1 billion, with the divisions containing infrastructure services declining.

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