IBM CEO: Why we just made this 'landmark' business move

Brian Sozzi
·Editor-at-Large
·3-min read

IBM CEO Arvind Krishna — who took over in April from long-time leader Ginni Rometty — is wasting no time putting his stamp on Big Blue.

Shares of the tech giant (IBM) rocketed 7% on Thursday on news the company will spin off its managed infrastructure services business inside its global technology services. That will create a new public company currently dubbed “NewCo” by the end of 2021. By spinning off the business, Krishna aims to hyper focus IBM on its opportunity in hybrid cloud, following its 2019 acquisition of Red Hat.

“I think today is a landmark day for our company,” Krishna told Yahoo Finance’s The First Trade. “When I first became CEO, I talked about a relentless focus on growth. And when we look at growth, we also said it will be focused on hybrid cloud and AI. That’s a trillion dollar total addressable market. And given that trillion dollar market and given our confidence in the platform that is based on Red Hat’s technologies, now is the time for us to double down on hybrid cloud.”

Krishna and CFO Jim Kavanaugh made it clear to Wall Street back on an earnings call in July that work was well underway to refocus the portfolio. So to long-time IBM watchers on the sell-side, the spin-off shouldn’t come as a shock. But to the casual IBM watcher that has seen the stock lag for years under Rometty, the spin-off by Krishna is likely a “hello, welcome to the new IBM moment.”

FILE - In this March 18, 2019, file photo, the logo for IBM appears above a trading post on the floor of the New York Stock Exchange.  IBM says it is breaking off a $19 billion chunk of its business to focus on cloud computing. The 109-year-old tech company said Thursday, Oct. 8, 2020,  it is spinning off its managed infrastructure services unit into a new public company, temporarily named NewCo.  (AP Photo/Richard Drew, File)
FILE - In this March 18, 2019, file photo, the logo for IBM appears above a trading post on the floor of the New York Stock Exchange. IBM says it is breaking off a $19 billion chunk of its business to focus on cloud computing. The 109-year-old tech company said Thursday, Oct. 8, 2020, it is spinning off its managed infrastructure services unit into a new public company, temporarily named NewCo. (AP Photo/Richard Drew, File)

In one fell swoop, Krishna signaled there are no sacred cows (other than hybrid cloud) at IBM and he desires to lead a more focused company. With better focus, it often means opportunities to expand profit margins (cost cuts, growth additive acquisitions, etc.) and get the stock working higher again in the process. It’s possible that proceeds from the spin-off get used in shareholder friendly ways, too — think special dividend or stock buybacks.

Now, whether IBM’s stock gets a multiple nearer to other cloud plays such as Microsoft and Amazon (the forward price-to-earnings multiple for IBM before the deal was around 9.5 times versus 31 times for Microsoft, according to Yahoo Finance Premium data) is a wildcard. It will require strong execution by Krishna and perhaps more re-shaping of the portfolio.

To be sure, Krishna is aware of all of that.

“Wall Street governs the multiple,” Krishna said. “About half of the business will be software and solutions. So that itself tells you there is a mix change going forward and that does come with their own attractive investor base and profile. That, by the way, determines the multiple which as I said is an outcome.”

Brian Sozzi is an editor-at-large and co-anchor of The First Trade at Yahoo Finance. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn.

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