IBM shares rise amid plans to outsource its IT infrastructure unit and concentrate on the cloud enterprise
IBM announced on Thursday that it would spin off its IT infrastructure unit into a new publicly traded company in order to focus its previous business more on cloud computing, a high-margin segment that has seen an upswing as companies accelerate their digital transformation.
The company's shares rose more than 5% in the early afternoon.
Specifically, IBM will spin off the Managed Infrastructure Services unit of its Global Technology Services business into a new company called NewCo by the end of 2021. IBM says it will manage and modernize its own infrastructures, which equates to $ 500 billion in market opportunities. J.P. Morgan and Lazard are acting as financial advisor to the transaction.
"We believe that with the financial flexibility we will create with this transaction, we will be able to achieve strong growth within the company," CEO Arvind Krishna told CNBC's "Squawk on the Street".
IBM has scaled back its old businesses over the years to focus on the cloud to offset the slowdown in software sales and seasonal demand for its mainframe servers.
Krishna, who took over the management of Ginni Rometty in April, said IBM's software and solutions portfolio will account for the majority of the company's revenue after the split.
"IBM will focus on its open hybrid cloud platform and its AI capabilities," Krishna said earlier Thursday in a prepared statement. "NewCo will be more flexible in designing, operating and modernizing the infrastructure of the world's most important companies. Both companies will find themselves on an improved growth path and will be able to become partners and take advantage of new opportunities – and thus value for customers and shareholders to create. "
Krishna led the $ 34 billion acquisition of Red Hat by IBM, an enterprise software maker that is now part of IBM's hybrid cloud division.
"The success we've had with Red Hat gives us confidence that this is the right step," he added, describing the move as a "significant change" in the company's business model. IBM's Cloud and Cognitive Software segment, which also includes Red Hat, achieved revenue of $ 5.75 billion in the second quarter of 2020, slightly exceeding analysts' estimates. The Global Technology Services unit, from which the new company will be spun off, posted $ 6.32 billion in the second quarter, down 8% year over year.
IBM also released preliminary financial results for the third quarter. The company expected third quarter revenue of $ 17.6 billion and adjusted earnings per share of $ 2.58, according to Wall Street estimates. IBM is expected to post a profit for the third quarter on October 21st.
– Reuters contributed to this report.