IB M(e) No More - The Average Joe

IB M(e) No More

October 14, 2020

Feeling nostalgic? IBM, the company that used to sell you those clunky PCs back in the 90s, is splitting its company into two.

As part of a strategic shift to focus on the cloud, the company is splitting its infrastructure business, which makes up nearly a quarter of its revenue, into a new company.

At 109 years old, IBM is busy playing catch up and trying to reverse its decade of declining revenues. IBM today focuses on selling and managing data centers, software tools and other services to business clients. Over the past few years, IBM has made a series of moves to make itself more competitive against its rivals: Amazon, Microsoft and Google:

  • Acquired Red Hat for $34b in Oct. 2018… This move accelerated IBM’s transition to cloud computing and gave IBM a much needed boost in revenue and growth.
  • Arvind Krishna took over as CEO in Jan. 2020… All eyes will be on Krishna, a technologist by trade, who is expected to restructure the business for growth.

Don’t let the door hit you on the way out

Sales in its slow-growth infrastructure portion of the business fell 6% last year while its cloud business grew 30%. The split will separate these divisions into two separately traded companies:

  • The old IBM… Will focus on its fast-growth cloud and artificial intelligence business.
  • The new IBM (name TBD)… Will focus on the slow-growth portion of the business that manages corporate computer systems.

Everyone wants a piece of the $111b cloud infrastructure market, which is dominated by Amazon Web Services (33% market share), Microsoft Azure (18%) and Google Cloud (9%). At 5% market share, IBM has a lot of catching up to do. In an interview with Financial Times, IBM’s CEO stated that the split will give IBM more flexibility to invest into its cloud business.

(CatchupWhat is the cloud and how you can invest in this fast-growth industry)

For investors… IBM’s stock has been anything but a stellar investment. In the past 7 years, IBM’s stock has been steadily declining in value by over 40%. Even though IBM pays a dividend of ~5% each year, considering that the company lost on average 7% per year over the past 7 years, you would have been better off not investing.

Splitting the company could direct more resources and focus on the fast-growth portion of the business. But it’s still too early to tell how the split will impact IBM’s stock going forward. For those looking to catch the cloud industries’ growth, there may be better ways to invest.

The split is expected to be completed by the end of 2021.

(See alsoWhy Caesar’s is splitting their fast-growth online gambling company and slow-growth hotels/casino business)