IBM plans to spin off the Managed Infrastructure Services business within its Global Tech Services (“GTS”) segment (approximately $19B TTM revenue through June 2020). Doing so will provide more air time to the acquired RedHat OpenShift (IBM’s “Hybrid Cloud” strategy) and cognitive computing businesses. Post-spin, the growth in these businesses will make a greater revenue contribution and ultimately help drive IBM back to consistent modest revenue growth.
We are in favor of any transaction that drives revenue growth and profitability (at a reasonable price), while enhancing customer value. Typically when we speak in these terms we are referring to M&A transactions. However, we are also a fan of spin-offs when they make sense (for example, we would like for Amazon to spin-off AWS).
IBM’s Infrastructure Services business is hardly a growth engine. Further, it obfuscates revenue growth on the RedHat (container application product family) side of the business. IBM’s container and cognitive computing businesses will benefit from more daylight post-spin, both in terms of Executive Management focus and investor attention. In addition, the Infrastructure business may benefit post-spin from a focused management team that will have a bit more autonomy to get creative in terms of driving growth (M&A would seem to be the prescription here). IBM’s spin-off will take approximately one year to complete.
Spin-offs are not terribly common across Enterprise Software, but are quite common in Telecom/Media (John Malone’s Liberty portfolio) and Internet/E-commerce (Barry Diller’s IAC portfolio).
We would like to see IBM place a greater strategic emphasis on building out its partner ecosystem with vertical leaders. These partners would be a mix of Application Software, Tech-Enabled Services and Info Services companies that each have a strong industry vertical presence.
IBM’s spin-off presentation: access HERE
IBM-Strategic-Update-2020