GTS also provides services involving hosting, networks, storage, data management, devices and IoT management. A worrying factor for Wall Street, or at least for Bernstein, is that the ITO organisation helped drive $2bn to $2.5bn worth of hardware and software deals a year, he said, and there may be a "potential loss of account control.". According to IBM, “NewCo” has relationships with more than 4,600 clients in 115 countries. Nonetheless, NewCo could fare better against IBM's IT services rival Accenture (NYSE:ACN) as a stand-alone company. RESEARCH TRIANGLE PARK – IBM isn’t disclosing a great deal yet about the “NewCo” spinoff it announced Thursday, but some points have been made quite clear: Costs will be … A lot of investor focus is on the infrastructure providers. Implications for IBM Customers From Company Split. So, it is possible that IBM may be angling to sell NewCo to another firm. Krishna made soothing noises about sustainable revenue growth, Sacconaghi acknowledged. Here's an overview of our use of cookies, similar technologies and Part of Situation Publishing, Biting the hand that feeds IT © 1998–2020, Also hosed out many Datrium staff on day one. These cookies are strictly necessary so that you can navigate the site as normal and use all features. The division has declined due to the impact of the cloud on big ticket outsourcing and the area has been subjected to annual redundancies since 2016, the most recent round starting in March. IBM’s announcement of the separation stated that NewCo’s strategy is to modernize and transform that legacy business and turn it into an attractive portfolio. I am also the author of the industry best-selling book, “Turning Lead Into Gold: the Demystification of Outsourcing.” You can find me regularly featured in international business media including the Wall Street Journal, New York Times, and Financial Times, and I am a frequent keynote speaker at various industry events. Over the past 25+ years, I have led Everest Group to be on the frontier of the global services industry – today that means delivering the critical expertise to help organizations drive and adopt complex business transformation, emerging technologies, and disruptive business models as new sources of growth and competitive differentiation. You can also change your choices at any time, by hitting the We then take advantage of the hybrid cloud platform to take them from where they are, to where they want to go. IBM's Executive Chairman Ginni Rometty explained how IBM and NewCo will capitalize on their respective strengths, saying: "We have positioned IBM for the new era of hybrid cloud. IBM Provides Historical Data to Reflect Offering Realignment August 02, 2019 IBM and Red Hat: Better Together July 09, 2019 IBM Completes Acquisition of Red Hat Quarterly Earnings 2020 Q3. IBM went through a near-death experience in the 1990s, but mainframes carried on being used for mainframe things and IBM remained a big tech company. The truth is there are big opportunities here to use automation and cloud migration to streamline the costs and capital requirements for infrastructure,” he said. He added: “The economics of a platform approach are compelling. Implications for customers if a sale is not the intention. A significant number of IBM customers have contracts that will expire in the next two years and will be forced to make decisions at that time (if not earlier) to take full advantage of options. In fact, IBM’s mainframe installed base (measured in MIPS) has grown to be over ten times larger since 2000. IBM’s announcement of the separation stated that NewCo’s strategy is to modernize and transform that legacy business and turn it into an attractive portfolio. My advice? The purpose of this study is to provide readers with a framework to evaluate the potential financial impact for their organizations of an investment in a Pure Storage FlashArray storage solution. NewCo is “already a market leader in scale and capability,” Krishna said. Bernstein's Sacconaghi said that overall the analyst house was “modestly positive/incrementally hopeful that change is afoot” at Big Blue. They allow us to count visits and traffic sources so that we can measure and improve the performance of our sites. And for GTS? GTS, also referred to by IBM as managed-infrastructure services, provides outsourcing services and includes a unit called Information Technology Services that does project work for clients “mostly on their on-premises infrastructure,” Big Blue said. Some customers may find it attractive to participate in that as an opportunity to help finance their modernization on the portfolios IBM currently manages for them. NewCo will have greater agility to invest in the next-generation transformational infrastructure services,” he added. "In essence, IBM is spinning out a declining, low/unprofitable asset, and taking a large charge to help reduce stranded costs, and boost the profitability of the resultant entities," Sacconaghi concluded. This means clients can now deploy our software anywhere OpenShift runs.”. and ensure you see relevant ads, by storing cookies on your device. IBM announced its intention to spin off its infrastructure services business as a separate public company, allowing Big Blue to focus on hybrid cloud and AI. IBM will be the leading hybrid cloud and AI company, while NewCo is expected to be the world’s leading MIS provider after the deal conclusion. Be patient and work with the two companies through the separation complexities for probably two years as well as the time to modernize NewCo, which will take a lot of the companies’ time and energy. Challenges will occur with option #2, triggered by unbundling or moving existing IBM/NewCo services. Earnings announcement Press Release (85 KB) pdf. … Or is it the other way round? NewCo’s thousands of “technology-intensive” enterprise customers include many that are “in the highly regulated industries that have been very cautious about utilizing less mature public cloud services,” Abbott said. Those 20,000 staffers would be about 6 per cent of IBM's 350,000-plus-strong workforce. Analysis IBM will push through a major restructure at the IT outsourcing business it's spinning off, with 20,000 or more staffers facing the chop, an analyst estimated. It would appear that IBM is creating a substantial war chest from which to fund this activity and potentially fund the modernization. IBM said NewCo has a backlog of $60 billion and that it will be a publicly traded company. The end game is accelerated growth. For now it's called NewCo, though IBM CEO Arvind Krishna said in a conference call with stock-market analysts last week, when the deal was announced, that a new name will be sought. That constituted 32 percent of its sales, and when it jettisons a little less than a third of itself with the NewCo spinoff announced a few weeks ago, these core systems will represent about half of revenues at the company. Charts (277 KB) pdf. It’s driven off a ‘we’ll run your mess for less’ value proposition for CIOs seeking to get out of the infrastructure management business. The as-yet to be named “NewCo” will “immediately be the world’s leading managed infrastructure services provider” as noted in IBM’s October 8th press release. So though IBM may be an also-ran in public cloud, it still has time to make its presence felt, with hybrid cloud spanning off and on-premises gear. IBM (IBM) closed the most recent trading day at $124.70, moving -1.97% from the previous trading session. Success will depend on how the management teams of the two companies handle the separation challenges. It is important to note that the NewCo spinoff is just one aspect of a larger strategic refocusing that IBM’s leadership is planning. Every dollar spent on the platform creates additional value above and below. Besides, it also has more than 75% of the Fortune 100 companies, a backlog of $60B (approx €50.7B), and more than twice the scale of its nearest competitor. (IBM stock analysis - strategy - Source: IBM investor relations) The spin-off will be tax free and the company called NewCo. But a lot of value is generated above the platform layer: another $3 to $5 is spent on software, and another $6 to $8 on the cloud services. But clearly, there are impacts outside of IBM. For IBM, the conscious uncoupling means it will be “maniacally focused on being the best hybrid cloud platform and AI company leveraging a leading open platform, our incumbency and our expertise to help clients with their digital transformations,” said Krishna. A sale of the $19B NewCo is certainly possible, but there are some challenges. 2. If you are an IBM customer, here is the question you need to ask: What are the implications for my company because of the separation, whether or not the intention is to sell NewCo? Oh no, you're thinking, yet another cookie pop-up. “Customise Settings”. The jury is out on whether Whitman’s period of control at HP was successful: each of the component parts that were spun out have and continue to face their fair share of challenges as standalone businesses. ", Sacconaghi added: “The alternative, more positive perspective is that such divestitures happen all the time in tech – HP, as was, saw a fair share of goings and goings under former CEO Meg Whitman – and IBM may be able to grow when unshackled from a unit that has been an anchor.”. The new company will have 90,000 employees, out of IBM's current headcount of 325,000 employees, and its leadership structure will be named over the coming months. So, customers run a risk of NewCo and IBM employees’ deteriorating morale. This of course is shared by IBM and our ecosystem partners so everyone wins, helping to lift all boats.”. See International Business Machines (IBM) stock analyst estimates, including earnings and revenue, EPS, upgrades and downgrades. Hear how teams are implementing a secure DevOps workflow to ship apps faster and confidently run them in production. That said, it appears that the restructuring charge will largely be focused on right-sizing and boosting margin at NewCo and eliminating stranded costs at IBM, with the majority of savings being 'reinvested' in remaining IBM.". Well, sorry, it's the law. The deal will create NewCo, a managed infrastructure services company with $19B TTM revenue that will focus on IT infrastructure modernization. However, there is a downside. And despite the availability of significant capital, it is likely that IBM will need to cut costs in that process, which means layoffs. 5/5 (6) . Most of the news analysis so far has been focused on IBM’s corporate alignment and what it means for IBM. (IBM stock spin-off - Source: IBM investor relations) This massive market opportunity could see IBM return to growth. "IBM will arguably be more focused, and more svelte at $60bn in revenues vs $80bn today," said Sacconaghi. "Cynically, one could argue that IBM's spinout simply represents financial engineering: IBM will boost its revenue and growth rate by spinning out IBM's negative growing, currently unprofitable ITO (IT outsourcing) business, and the company gets a free pass to do a significant restructuring which will materially impact free cash flow. As 2020 unfolded, the way we work together changed in fundamental ways. Top-performing DevOps teams automate more functions as part of their toolchain, including monitoring and security. IBM said Thursday it would spin off its IT infrastructure unit into a new publicly traded company to focus its legacy business more on cloud computing, a high-margin segment that has … They do generate $1 to $2 for every dollar spent on the platform. Most of the services industry seeks to acquire assets for growth, and NewCo’s assets would provide a large book of business. 1. Analysis IBM will push through a major restructure at the IT outsourcing business it's spinning off, with 20,000 or more staffers facing the chop, an analyst estimated. © 2020 Forbes Media LLC. Our family of cloud paks extends capabilities with cloud ready open software packages integrated on OpenShift. “This ($2.3bn charge) is really centred around positioning NewCo to have a solid EBITA growth profile moving forward and address stranded costs, and also to enable significant financial flexibility to enable reinvestment back into our company [IBM] to accelerate that growth profile,” said the CFO. The Global Technology Services (GTS) division, minus a few elements, will be carved out into a separate public company. Is this an IBM exercise in "financial engineering or value creation?" Globally, around 25 per cent of workloads are expected to be running in the public cloud by the end of the year, said Krishna, with mission-critical work either on premises or in a private cloud. Of the two independent companies, IBM will focus on "digital transformation journeys" which will be a $1 trillion opportunity, and NewCo will work on "infrastructure modernization" which is a $500 billion market, according to Krishna and Rometty. something that confounded the Wall Street analyst before. Last year IBM bought Red Hat, containerized its software, and launched Cloud Paks to sell more of its vast but fragmented software portfolio as a service. Toni Sacconaghi, a Wall Street analyst on the call, described the spin-off as "essentially growth through subtraction," implying IBM is getting a GTS-shaped weight off its back. OpenShift is our core product that captures the values and works through the entire range of clients,” said Krishna. The chief exec said IBM will also invest in business partnerships and in ways to bring those businesses to its hybrid IT platform. RESEARCH TRIANGLE PARK – IBM’s announcement today to spin off a new company focusing on technology infrastructure services is triggering a lot … IBM announced its intention to separate into two companies, and I blogged recently about some potential implications. “Linux is the de facto operating system standard and market share leader. With the growth mindset going all in on hybrid cloud and AI and increased investments, we expect to drive sustainable, mid single digit revenue growth over the medium term.”. IBM said NewCo would manage and modernize client-owned infrastructures, which it said is a $500 billion market opportunity. IBM's growth rate will rise by 100+ basis points following the spin-off, the analyst predicted. These cookies collect information in aggregate form to help us understand how our websites are being used. It would be like trying to catch a falling knife. Without these cookies we cannot provide you with the service that you expect. The exec-level spin on the company being spun out is that it will be good for everyone involved: customers, investors, and employees. These are intriguing choices that all IBM customers will be forced to make. He added: "Let us be clear. Getting shot of GTS. It will become a new public company, a spinoff that for now IBM is calling “NewCo.” The Global Technology Services business generated $26.4bn in revenues over the past four quarters with operating margin of 6.5 per cent. But do not overlook your own opportunities and options. I am the CEO of Everest Group, a management consulting and research firm I founded in 1991 with headquarters in Dallas and offices around the globe. Although NewCo will be a large entity and, therefore, likely will have financial stability, the probability of a sale depends on how much debt the acquirer takes on and its management capabilities to drive the transformation. “Infrastructure services has been a declining-margin business for years. I am the CEO of Everest Group, a management consulting and research firm I founded in 1991 with headquarters in Dallas and offices around the globe. IBM on Thursday announced a strategic plan to unleash the power of the company on the $1 trillion hybrid cloud opportunity. For instance, it will take two years just to work through the complexities of separating NewCo from IBM. Move some or all your work components to other third-party service providers that can focus exclusively on your company and your customers. NewCo. That would be the risk. Red Hat Linux, along with containers and Kubernetes, provides the architectural foundation. The Global Technology Services (GTS) division, minus a few elements, will be carved out into a separate public company. To achieve this vision, IBM will separate the managed infrastructure services unit from its Global Technology Services division. This includes the Technical Support Business (TSB) which brought some $6.4bn in revenues and 30 per cent pre-tax income margins. The NewCo – with a $60bn services backlog, 4,600 clients including 75 per cent of the Fortune 100, a reach into 115 countries, and for now 90,000 staff – will “build on its core strengths, managing complex and mission critical infrastructures,” said the CEO. Additionally, IBM will separate its Managed Infrastructure Services unit of its Global Technology Services division into a new public company ("NewCo"). Implications for customers if a sale is the intention. As for the NewCo? "IT outsourcing deals – like high-end mainframe and UNIX hardware – are typically strategic in nature, and anchored at the highest level of client organisations and provide a vehicle for selling in high-margin software and hardware," the analysts added. Announced last week, the decision to split IBM into two public companies by the end of 2021 was made, in an aim to shift focus to higher-margin endeavours, including artificial intelligence (AI) and the cloud.. A second company dedicated to legacy IT infrastructure, called NewCo, is set to be established next year. This will include IBM’s Managed Infrastructure Services division. It is still early days from the announcement, but there is no IBM announcement of a lead CIO or management team for the legacy spinout (“NewCo”). The Case for IBM Spinning-off the “NewCo” Global Infrastructure Business By Charles King, Pund-IT® October 14, 2020 IBM’s recently announced plan to spin-off the Infrastructure Services business unit in its Global Technology Services (GTS) group as a new, freestanding organization was both surprising and unsurprising. IBM's planned NewCo spinoff signals a 'maniacal focus' on hybrid cloud, AI By keeping its storied brand name associated with its cloud platform and artificial intelligence work, while splitting off a new company focused on managed infrastructure services, Big Blue is gearing for an innovative but competitive future. Our mainframe and software portfolio is where they tend to do that. The CEO said the spin-off “affords us optionality and we can pivot to a sale if qualified buyers emerge.” And to us, that seems to be what this whole exercise has been about. Krishna said Big Blue has no plans for further significant restructuring, and tried to justify why IBM is retaining the elements it is: Our integrated value proposition says I want to take advantage of the incumbency of clients running mission critical workloads. TSB, however, is not being included in the operations moving to the NewCo. It would take a lot of capital, a lot of effort and management focus. "We struggle to see NewCo growing," he said. Realising that hybrid cloud and artificial intelligence need to be the focus in order to grow and succeed, IBM has decided to spin its managed infrastructure services division — which makes up one fourth of its sales and workforce — into a new entity, NewCo. Final analysis. For more info and to customise your settings, hit But the response to the spin-off wasn’t entirely positive. how to manage them. the analyst asked. Over the past 25+…. These cookies are used to make advertising messages more relevant to you. We measure how many people read us, EY & Citi On The Importance Of Resilience And Innovation, Impact 50: Investors Seeking Profit — And Pushing For Change, Michigan Economic Development Corporation With Forbes Insights. IBM wasn't focused on growing company-wide turnover during much of former CEO Ginni Rometty’s tenure - from 2011 until 2019 she was partly paid on the growth of IBM's Strategic Imperatives (social, security, mobile, cloud and analytics) - and this was something that confounded the Wall Street analyst before. What goes up must come down. There are a few firms that might find this attractive, but I think that a sale will be difficult. Management expects both … Both firms have deep talent, but distractions can occur. ®, The Register - Independent news and views for the tech community. As I mentioned, IBM will have a war chest to potentially fund the modernization of NewCo. I believe that few firms will want to acquire NewCo, particularly given the size of the investment and the size of the book of business. ... And really, a lot of that is tied to the IBM systems, in the final analysis. With 90,000 employees, NewCo will offer things like network services, cloud migration services, and … As of June 2020, IBM said it has 2,400 clients using its hybrid cloud platform, tripling in the past 24 months. With unified visibility and security across AWS tools and services, you can accelerate application delivery. Sorry song fails to quell online discontent, rumors swirl of competition ahead, EU-mandated worker rep group took Big Red to court, lost, appealed, lost again, Ax falls on staff as customers seemingly slow to embrace subscription model, Let's strap these bricks together and maybe we'll make a boat, This research paper will explore the new platform and assess its strengths and weaknesses compared to the growing cadre of potential competitors. 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