Summary
- IBM announces plans to spin out the managed infrastructure services unit by late 2021.
- The company will now focus on the $1 trillion hybrid cloud opportunity.
- IBM has a history of major divestitures that haven't led to higher stock prices.
- The stock is cheap, if the tech company can generate pre-COVID earnings of $14+ per share.
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International Business Machines (IBM) initially rallied over 12% on news of the company splitting up. The stock lost half of those gains as the reality set in that splitting the company into two entities doesn't necessarily create value. The new hybrid cloud business might have more value as a separate entity, but the legacy managed services unit is in secular decline and could see less value. My investment thesis on IBM remains bullish due to the value, not the corporate split.
Image Source: IBM website
Corporate Split Up
IBM plans to pivot to a hybrid cloud growth strategy by spinning off the managed infrastructure services business. The core IBM will focus on the cloud business with a $1 trillion market opportunity, which includes the Red Hat part of the business, while the spin off to shareholders will be called NewCo.
The new IBM will have a revenue base of $59 billion and NewCo will sit around $19 billion. The goal is to complete the split by the end of 2021, which is an incredibly long period of time for management to spend splitting up a large company and potentially be distracted from cloud growth initiatives.
Source: IBM Strategic Update presentation
IBM ended June with $28.5 billion in net debt so how these businesses perform going forward could depend on how the debt is allocated. The company is targeting at least investment grades for both companies, but the devil will be in the details considering total debt is actually $42.8 billion.
