Tech titan IBM is splitting itself into two separate entities after 109 years in business.
In a blog post penned by CEO Arvind Krishna, IBM will break up its main business, IT infrastructure and technical support and list it as a separate, independent company.
Krishna called this a “significant shift” in IBM’s business model. Hardware provision and support has been the backbone of IBM’s business for over a century, which has propelled IBM to become the world’s first big computing firm.
IBM will now officially devote resources to sharpening its open source cloud computing and AI technology, which Krishna states has a US$1 trillion growth opportunity and currently accounts for more than 60% of the company’s revenue.
As of now, the new company will be known as “NewCo” and is expected to commence its business by the end of 2021. The new company will have 90,000 employees and its leadership structure will be decided in a few months, Chief Financial Officer James Kavanaugh told Reuters.
“I am confident this is the right move and that our collective future is brighter as a result,” wrote Krishna in his blog post.
IBM’s shares soared after Krishna’s announcement, its shares up nearly 6% by the end of trading day, a few hours after the announcement.
“I am excited about the path ahead and the tremendous value we will create by having two companies focused on what they do best. This will benefit our clients, employees, and shareholders and place both IBM and NewCo on an improved growth trajectory,” said Krishna.
The tech heavyweight expects to record nearly US$5 billion in expenses related to the separation and operational changes
IBM’s historic shift in core tech operations is perhaps the biggest case to date that shows the growing demand of cloud technology, a force which, by now, seems inevitable in a post-pandemic world.
IBM was late to the cloud game, an industry that is already dominated by Microsoft and Amazon. But since its entry, the company has made some landmark moves. Last year, IBM acquired world-class open source cloud platform Red Hat for US$34 billion to supercharge its cloud business.
In September, IBM and RedHat joined forces with world oil drilling company Schlumberger in a historic agreement to leverage cloud computing onto the oil and gas industry.
According to Wedbush Securities analyst, Moshe Katri, IBM is getting rid of a shrinking, low-margin operation given the cannibalizing impact of automation and cloud, masking stronger growth for the rest of the operation.
NewCo already has an extensive portfolio of clients and will continue to serve 4,600 clients across 115 countries. IBM’s Technology Support Services (TSS) unit under its IT infrastructure arm will remain an integral part of the company going forward.
“Both companies will share the same DNA,” wrote Krishna.
IBM, which has sought to make up for slowing software sales and seasonal demand for its mainframe servers, said it would now focus on open hybrid cloud and AI solutions that will account for more than half of its recurring revenues.
The company expects a third quarter revenue of US$17.6 billion.