IBM is no stranger to strategic spinoffs
In brief: IBM is creating a new company to handle its cloud IT service segment that will cater to over 4,500 clients. Its primary focus will be product development and augmented service delivery to cement the company’s position as a market leader. The new devolved company is set to be christened before its unveiling next year.
IBM has announced that it will be splitting the company into two in order to increase its revenue margins. According to a statement issued by CEO Arvind Krishna, the company is diversifying away from its traditional portfolio and growing its cloud computing service. A new company codenamed NewCo will be handling the spun-off business.
IBM said the split will allow it to focus on areas with immense potential for growth. It has divulged that NewCo will be a new market leader in cloud IT-managed services right from the get-go. The legacy firm will take over service provision for over 4,500 clients spanning over 100 countries that are currently subscribed to the parent company.
It will additionally have more than 50 percent recurring revenue, and a market share valued at over $60 billion.
Investors have welcomed Krishna’s decision to create a specialized spinoff. Subsequently, news of the split sent IBM shares soaring by seven percent.
“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,” the executive explained during a call with market analysts.
NewCo will be leveraging IBM’s current innovative hybrid cloud architecture, which is powered by Red Hat OpenShift. The platform supports the integration of its cloud services with the entire range of IT infrastructures currently run by its existing clients. According to IBM, this approach doubles the value offered to clients when compared to public cloud-only services.
IBM acquired Red Hat for $34 billion last year. The buyout gave IBM unfettered access to the company’s inventive technologies, which allow seamless unification of advanced AI capabilities and application upgrade services. At the time, IBM touted fortified security and unmatched service delivery among the main benefits of the Red Hat acquisition.
IBM has faced revenue growth challenges in the past couple of years. Increased competition, as well as falling demand for its software range, has contributed to this. Its mainframe server supply business is also facing an uncertain future, hence the shift to open hybrid cloud services and artificial intelligence solutions. These two areas currently account for over 50 percent of the company’s recurring revenue.