IBM Splits Company, Stock Soars

The 109-year-old tech giant is splitting off its IT infrastructure unit into a separate public entity.
Steven LernerOct 08,2020,19:55

International Business Machines Corporation (NYSE: IBM) announced it is breaking up its company, which resulted in its stock price breaking out a gain of up to 7% on Thursday.

The 109-year-old tech giant is splitting off its IT infrastructure unit into a different public company. The move is a way to clearly separate the old IT infrastructure business for which the company has been known historically from its new focus on its growing high-margin cloud computing business. This implicit recognition that IBM needs to change its focus and shed its dinosaur image was applauded by shareholders.

An official name for the new company, which IBM is currently calling NewCo, will be announced by the end of next year. The company’s leadership structure will be disclosed in a few months.

IBM’s cloud and AI solutions business will account for the majority of its revenue after the breakup.

Says CEO Arvind Krishna: “Both companies will be on an improved growth trajectory with greater ability to partner and capture new opportunities – creating value for clients and shareholders.”

Today’s announcement is the culmination of IBM’s strategy to trim its legacy business. The company has eliminated numerous business units since the 90s, including networking, personal computers, and semiconductors.

Wedbush Securities analyst Moshe Katri says that the IT infrastructure business was “masking stronger growth for the rest of the operation.”

Although IBM will incur nearly $5 billion in expenses just to enact the separation, Krishna told CNBC that the decision will ultimately “deliver strong growth” due to the financial flexibility created from this transaction.

To balance out the costs, it is possible that IBM could eliminate jobs.

An IBM spokesperson told North Carolina television station WRAL that while the vast majority of employees will have roles in either business, the company will “complete our planning over the next few months and will advise accordingly.”

As part of today’s announcement, IBM disclosed some preliminary earnings results for the third quarter. Revenue reached $17.6 billion, meeting analysts' expectations.