(Bloomberg Opinion) -- Even after International Business Machines Corp.’s blockbuster $34 billion acquisition of whiz kid Red Hat last year, the company has struggled to change its image from a stodgy technology firm to a cutting-edge player in cloud-computing and software. Now a bit of financial engineering may help.
Early Thursday, IBM announced plans to spin off its managed infrastructure-services business, which accounts for roughly a quarter of its revenue, by the end of 2021. It will be a significant business model shift: After the transaction, the company’s services segment will move from a majority to a minority of its revenue mix. Management gave further details on a conference call, saying the newly spun-off company will be focused on “operational efficiency and cash generation,” which signals greater capital returns to shareholders, while core IBM will increase its research and development spending to spur more growth. As a result, the company expects revenue at core IBM to grow in the mid-single digits over the medium term. That would be a positive change compared with a series of quarterly sales declines for the company over the last two years.
By now everyone knows the pandemic has accelerated the shift toward cloud computing. To enable remote-working, companies have shifted spending away from traditional on-premise equipment to cloud-related software, taking advantage of the flexibility and scalability benefits it provides. IBM’s announcement is an acceptance that technology’s new paradigm is here to stay.
But does IBM’s move make sense strategically? It does. IBM is basically spinning off all the non-cloud businesses that are in secular decline — including outsourcing projects and management services of computing operations inside corporations — while the better cloud-oriented businesses with actual growth prospects will remain. And the company has proved it can compete in the cloud with the success of its Red Hat acquisition. Under the IBM umbrella, Red Hat has maintained and solidified market leadership of key cloud software segments such as Kubernetes and cloud-container management. That helped spur an 18% jump in the unit’s revenue in the second quarter, versus IBM’s overall 5% decline.
This isn’t a transformational transaction. But moving to focus on the markets that matter and having less distraction for management has little downside. At the very least, it gives investors a cleaner look at the growth-oriented areas, which will likely boost shareholder value. That’s a good thing. Investors seem to be cheering the move so far. IBM shares rose as much as 9% after the announcement.
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Tae Kim is a Bloomberg Opinion columnist covering technology. He previously covered technology for Barron's, following an earlier career as an equity analyst.
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