"IBM will arguably be more focused, and more svelte at $60bn in revenues vs $80bn today," said Sacconaghi. As I mentioned, IBM will have a war chest to potentially fund the modernization of NewCo. I believe that few firms will want to acquire NewCo, particularly given the size of the investment and the size of the book of business. “Your Consent Options” link on the site's footer. ®, The Register - Independent news and views for the tech community. The ITO business today that IBM is spinning out is a no-growth, break-even business.". NewCo is “already a market leader in scale and capability,” Krishna said. They do generate $1 to $2 for every dollar spent on the platform. Well, sorry, it's the law. That constituted 32 percent of its sales, and when it jettisons a little less than a third of itself with the NewCo spinoff announced a few weeks ago, these core systems will represent about half of revenues at the company. It would be like trying to catch a falling knife. the analyst asked. IBM said NewCo would manage and modernize client-owned infrastructures, which it said is a $500 billion market opportunity. Our mainframe and software portfolio is where they tend to do that. This includes the Technical Support Business (TSB) which brought some $6.4bn in revenues and 30 per cent pre-tax income margins. But a lot of value is generated above the platform layer: another $3 to $5 is spent on software, and another $6 to $8 on the cloud services. 1. It would appear that IBM is creating a substantial war chest from which to fund this activity and potentially fund the modernization. He added: "Let us be clear. If people say no to these cookies, we do not know how many people have visited and we cannot monitor performance. My advice? The exec-level spin on the company being spun out is that it will be good for everyone involved: customers, investors, and employees. It is expected that NewCo … Bernstein's Sacconaghi said that overall the analyst house was “modestly positive/incrementally hopeful that change is afoot” at Big Blue. This massive market opportunity could see IBM return to growth. NewCo’s thousands of “technology-intensive” enterprise customers include many that are “in the highly regulated industries that have been very cautious about utilizing less mature public cloud services,” Abbott said. GTS, also referred to by IBM as managed-infrastructure services, provides outsourcing services and includes a unit called Information Technology Services that does project work for clients “mostly on their on-premises infrastructure,” Big Blue said. "IT outsourcing deals – like high-end mainframe and UNIX hardware – are typically strategic in nature, and anchored at the highest level of client organisations and provide a vehicle for selling in high-margin software and hardware," the analysts added. Is this an IBM exercise in "financial engineering or value creation?" Hear how teams are implementing a secure DevOps workflow to ship apps faster and confidently run them in production. According to Forrester veep and principal analyst Ted Schadler, IBM had to “streamline the business” to focus its mind on “application and digital business transformation opportunities.”. ARMONK, N.Y., Oct. 8, 2020 / PRNewswire / -- IBM (NYSE: IBM) announced today it will accelerate its hybrid cloud growth strategy to drive digital transformations for its clients. The NewCo – with a $60bn services backlog, 4,600 clients including 75 per cent of the Fortune 100, a reach into 115 countries, and for now 90,000 staff – will “build on its core strengths, managing complex and mission critical infrastructures,” said the CEO. A worrying factor for Wall Street, or at least for Bernstein, is that the ITO organisation helped drive $2bn to $2.5bn worth of hardware and software deals a year, he said, and there may be a "potential loss of account control.". These cookies are used to make advertising messages more relevant to you. It is still early days from the announcement, but there is no IBM announcement of a lead CIO or management team for the legacy spinout (“NewCo”). IBM's Executive Chairman Ginni Rometty explained how IBM and NewCo will capitalize on their respective strengths, saying: "We have positioned IBM for the new era of hybrid cloud. Realising that hybrid cloud and artificial intelligence need to be the focus in order to grow and succeed, IBM has decided to spin its managed infrastructure services division — which makes up one fourth of its sales and workforce — into a new entity, NewCo. I think that is why those pieces stay together. This means clients can now deploy our software anywhere OpenShift runs.”. Getting shot of GTS. With 90,000 employees, NewCo will offer things like network services, cloud migration services, and … Red Hat Linux, along with containers and Kubernetes, provides the architectural foundation. RESEARCH TRIANGLE PARK – IBM’s announcement today to spin off a new company focusing on technology infrastructure services is triggering a lot … As 2020 unfolded, the way we work together changed in fundamental ways. Here's an overview of our use of cookies, similar technologies and The chief exec said IBM will also invest in business partnerships and in ways to bring those businesses to its hybrid IT platform. Additionally, IBM will separate its Managed Infrastructure Services unit of its Global Technology Services division into a new public company ("NewCo"). For IBM, the conscious uncoupling means it will be “maniacally focused on being the best hybrid cloud platform and AI company leveraging a leading open platform, our incumbency and our expertise to help clients with their digital transformations,” said Krishna. But the response to the spin-off wasn’t entirely positive. IBM on Thursday announced a strategic plan to unleash the power of the company on the $1 trillion hybrid cloud opportunity. Management expects both … Part of Situation Publishing, Biting the hand that feeds IT © 1998–2020, Also hosed out many Datrium staff on day one. IBM announced its intention to spin off its infrastructure services business as a separate public company, allowing Big Blue to focus on hybrid cloud and AI. (IBM stock analysis - strategy - Source: IBM investor relations) The spin-off will be tax free and the company called NewCo. This will include IBM’s Managed Infrastructure Services division. However, there is a downside. I am the CEO of Everest Group, a management consulting and research firm I founded in 1991 with headquarters in Dallas and offices around the globe. Implications for customers if a sale is not the intention. “Linux is the de facto operating system standard and market share leader. Implications for customers if a sale is the intention. “This ($2.3bn charge) is really centred around positioning NewCo to have a solid EBITA growth profile moving forward and address stranded costs, and also to enable significant financial flexibility to enable reinvestment back into our company [IBM] to accelerate that growth profile,” said the CFO. IBM said NewCo has a backlog of $60 billion and that it will be a publicly traded company. The Global Technology Services business generated $26.4bn in revenues over the past four quarters with operating margin of 6.5 per cent. Our family of cloud paks extends capabilities with cloud ready open software packages integrated on OpenShift. NewCo will have greater agility to invest in the next-generation transformational infrastructure services,” he added. But do not overlook your own opportunities and options. He added: “The economics of a platform approach are compelling. The truth is there are big opportunities here to use automation and cloud migration to streamline the costs and capital requirements for infrastructure,” he said. The division has declined due to the impact of the cloud on big ticket outsourcing and the area has been subjected to annual redundancies since 2016, the most recent round starting in March. A sale of the $19B NewCo is certainly possible, but there are some challenges. Oh no, you're thinking, yet another cookie pop-up. All Rights Reserved, This is a BETA experience. Krishna told analysts on the conference call that it was all about the money: “Our investment will be concentrated in areas that create value for our clients: hybrid cloud, data and AI, security and emerging technologies like quantum. NewCo. Most of the news analysis so far has been focused on IBM’s corporate alignment and what it means for IBM. Every dollar spent on the platform creates additional value above and below. Or is it the other way round? Globally, around 25 per cent of workloads are expected to be running in the public cloud by the end of the year, said Krishna, with mission-critical work either on premises or in a private cloud. However, that strategy for transforming the legacy business into a modernization platform presents an acquirer a substantial set of headaches. The proposed split will be effected by a pro-rata spin-off to IBM shareholders, and the move will be tax-free for US federal tax purposes, IBM confirmed last week. IBM will be the leading hybrid cloud and AI company, while NewCo is expected to be the world’s leading MIS provider after the deal conclusion. And despite the availability of significant capital, it is likely that IBM will need to cut costs in that process, which means layoffs. The deal will create NewCo, a managed infrastructure services company with $19B TTM revenue that will focus on IT infrastructure modernization. Over the past 25+ years, I have led Everest Group to be on the frontier of the global services industry – today that means delivering the critical expertise to help organizations drive and adopt complex business transformation, emerging technologies, and disruptive business models as new sources of growth and competitive differentiation. The newly formed entity, temporarily named NewCo, will offer project and outsourcing services that currently fall under its GTS business unit. A lot of investor focus is on the infrastructure providers. Both firms have deep talent, but distractions can occur. Challenges will occur with option #2, triggered by unbundling or moving existing IBM/NewCo services. ... And really, a lot of that is tied to the IBM systems, in the final analysis. 5/5 (6) . The as-yet to be named “NewCo” will “immediately be the world’s leading managed infrastructure services provider” as noted in IBM’s October 8th press release. IBM said NewCo would manage and modernize client-owned infrastructures, which it … Krishna said Big Blue has no plans for further significant restructuring, and tried to justify why IBM is retaining the elements it is: Our integrated value proposition says I want to take advantage of the incumbency of clients running mission critical workloads. 2. Analysis IBM will push through a major restructure at the IT outsourcing business it's spinning off, with 20,000 or more staffers facing the chop, an analyst estimated. “As a standalone company, NewCo management will be able to build a more efficient operating model focused on service delivery excellence. The Global Technology Services (GTS) division, minus a few elements, will be carved out into a separate public company. It is important to note that the NewCo spinoff is just one aspect of a larger strategic refocusing that IBM’s leadership is planning. The purpose of this study is to provide readers with a framework to evaluate the potential financial impact for their organizations of an investment in a Pure Storage FlashArray storage solution. For instance, it will take two years just to work through the complexities of separating NewCo from IBM. (IBM stock spin-off - Source: IBM investor relations) As of June 2020, IBM said it has 2,400 clients using its hybrid cloud platform, tripling in the past 24 months. To achieve this vision, IBM will separate the managed infrastructure services unit from its Global Technology Services division. These cookies collect information in aggregate form to help us understand how our websites are being used. “IBM’s middleware portfolio has been containerised. Most of the services industry seeks to acquire assets for growth, and NewCo’s assets would provide a large book of business. Opinions expressed by Forbes Contributors are their own. The CEO said the spin-off “affords us optionality and we can pivot to a sale if qualified buyers emerge.” And to us, that seems to be what this whole exercise has been about. I am the CEO of Everest Group, a management consulting and research firm I founded in 1991 with headquarters in Dallas and offices around the globe. The Global Technology Services (GTS) division, minus a few elements, will be carved out into a separate public company. IBM wasn't focused on growing company-wide turnover during much of former CEO Ginni Rometty’s tenure - from 2011 until 2019 she was partly paid on the growth of IBM's Strategic Imperatives (social, security, mobile, cloud and analytics) - and this was something that confounded the Wall Street analyst before. For now it's called NewCo, though IBM CEO Arvind Krishna said in a conference call with stock-market analysts last week, when the deal was announced, that a new name will be sought. We then take advantage of the hybrid cloud platform to take them from where they are, to where they want to go. IBM went through a near-death experience in the 1990s, but mainframes carried on being used for mainframe things and IBM remained a big tech company. IBM said Thursday it would spin off its IT infrastructure unit into a new publicly traded company to focus its legacy business more on cloud computing, a high-margin segment that has … Sorry song fails to quell online discontent, rumors swirl of competition ahead, EU-mandated worker rep group took Big Red to court, lost, appealed, lost again, Ax falls on staff as customers seemingly slow to embrace subscription model, Let's strap these bricks together and maybe we'll make a boat, This research paper will explore the new platform and assess its strengths and weaknesses compared to the growing cadre of potential competitors. The new company will have 90,000 employees, out of IBM's current headcount of 325,000 employees, and its leadership structure will be named over the coming months. IBM Provides Historical Data to Reflect Offering Realignment August 02, 2019 IBM and Red Hat: Better Together July 09, 2019 IBM Completes Acquisition of Red Hat Quarterly Earnings 2020 Q3. Charts (277 KB) pdf. … Likely, the result would be a smaller firm, shrinking the book of business. According to IBM, NewCo will own the entirety of IBM Global Technology Services’ existing clients that includes 4,600 accounts and roughly 75% of the Fortune 100. IBM’s announcement of the separation stated that NewCo’s strategy is to modernize and transform that legacy business and turn it into an attractive portfolio. ", Sacconaghi added: “The alternative, more positive perspective is that such divestitures happen all the time in tech – HP, as was, saw a fair share of goings and goings under former CEO Meg Whitman – and IBM may be able to grow when unshackled from a unit that has been an anchor.”. Move some or all your work components to other third-party service providers that can focus exclusively on your company and your customers. This of course is shared by IBM and our ecosystem partners so everyone wins, helping to lift all boats.”. how to manage them. TSB, however, is not being included in the operations moving to the NewCo. Last year IBM bought Red Hat, containerized its software, and launched Cloud Paks to sell more of its vast but fragmented software portfolio as a service. Although NewCo will be a large entity and, therefore, likely will have financial stability, the probability of a sale depends on how much debt the acquirer takes on and its management capabilities to drive the transformation. That would be the risk. See International Business Machines (IBM) stock analyst estimates, including earnings and revenue, EPS, upgrades and downgrades. Nonetheless, NewCo could fare better against IBM's IT services rival Accenture (NYSE:ACN) as a stand-alone company. IBM (IBM) closed the most recent trading day at $124.70, moving -1.97% from the previous trading session. 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