Legendary Tech Player IBM Prepares for Mitosis Moment, Focus Shifts on to Cloud

Summary

• IBM to focus on hybrid cloud growth strategy with the aim to drive digital transformation for its clients.
• Tech giant announces to separate its legendary business Managed Infrastructure Services unit into a new public company.
• Two separate businesses will focus on delivering advanced technology products while strengthening client and shareholder value.

After 109 years of history in IT infrastructure services, IBM is now spinning off onto a new cloud. International Business Machines Corp (IBM) is splitting itself into two public companies. One which focuses on hybrid cloud platforms and artificial intelligence capabilities. And its IT infrastructure services unit will be a separate company by the end of 2021.

After the announcement, IBM shares soared 6 per cent on October 8 as it ended at US$130.85 per share, up 5.98 per cent on the New York Stock Exchange.

Global technology major projects the growth in cloud technology business amid the coronavirus pandemic crisis. The technology giant has adapted to the new emerging trend since the last few years and announced on Thursday that the company is transforming its core business strategies.

Focus on Hybrid Cloud Growth

Arvind Krishna who spearheaded the position of Chief Executive Officer since this year April said that the move to reinvent is "a landmark day" for the technology legend IBM. He added that the change is redefining the company and investors applauded it wholeheartedly.

Krishna devised the US$34 billion Red Hat transaction for IBM last year, after which, company's shares shot up nearly 11 per cent in premarket trading.

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Hybrid cloud technology provides the opportunity worth US$1 trillion for IBM.

Since the last couple of years, the tech company has shifted its focus on high-margin cloud computing. The company is practically spurting to cope up with slow software sale and seasonal demand for its other product - mainframe server solutions.

CEO Krishna said that IBM's software and solutions products would continue to produce the majority of the company's revenue. Cloud computing business will be the main business and retain the brand name IBM. It will also have its hardware, software and consulting services portfolios in its kitty. These units generate nearly three-quarters of IBM's revenue.

Krishna believes that the success of Red Hat gives the company the right amount of confidence to consider the move - suitable for the company's further prosperity.

It is a significant shift in IBM's business model.

The tech biggie is expecting its third-quarter revenue of US$17.6 billion. An adjusted profit per share is likely to be US$2.58, which is in line with what Wall Street estimates.

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IBM's transformation into a Hybrid Cloud and AI Company

Ginni Rometty, IBM Executive Chairman, believes that the US$34 billion acquisition of Red Hat changed the equation for IBM. The company is already an industry leader for its managed infrastructure services business. The newfound spotlight on cloud computing has paved its way into the fastest-growing industry amid existing sector leaders such as Amazon Web Services, Microsoft and Google.

Its cloud computing platform provides powerful AI capabilities in order to access the power of data. It will also facilitate application modernisation services and systems to its clients. With its focus on cloud computing and AI solutions, IBM is reinventing itself as a high-value cloud software and solutions company. The integration will also simplify and speed up its operating models.

IBM also plans to have more than 50% of its portfolio in recurring revenues. IBM expects that its changing business strategy and tightly focused expansion in new avenues will reflect on its improved revenue and profit growth.

World's Leading Managed Infrastructure Services Provider

The statement released by IBM said that the new company would soon get a new brand name. It has existing relationships with more than 4,600 clients in 115 countries. Out of which 75 per cent of the clients are listed in Fortune 100 and have a backlog of US$60 billion.

Critical services like hosting and network, infrastructure modernisation, multi-cloud environments are core to IBM's client operations. The new company will take advantage of managing and modernising its client-owned infrastructure, which is US$500 billion worth's market opportunity.

IBM entered the cloud computing market much later than its competitors. Amazon pioneered it with its Amazon Web Services in 2006. Over a period of time, IBM paved its path into the fastest-growing technology industry and started to extend its cloud services and software technologies.

IBM acquired Red Hat last year for US$34 billion and unlocked some of the untouched areas to accelerate its step into the cloud market.

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Bottomline

Though IBM's managed infrastructure services provider business generates sales of around US$19 billion per year, it is not offering any sizable growth to the company.

Last year, IBM reported a 3 per cent decline in its revenue to US$77 billion. Its business module was also considered as an old-line business. IBM parted ways with its products and services which were not generating considerable revenue such as personal computers, disk drivers and few of its technology products.

Splitting its technology support business into a separate entity is a brave step and one which may show its results in near term.