IBM To Split Into Two Companies In Order To Focus On Cloud Computing, AI Businesses

International Business Machines (IBM), one of the most iconic names among American corporations, said it will split the company into two by the end of next year in order to focus on the growing and higher-margin cloud computing and artificial intelligence markets.

IBM said it will spin off its legacy infrastructure services unit as a yet unnamed public company (NewCo), while the other company, the “new” IBM, will largely be engaged in the cloud and artificial intelligence businesses.

IBM Chief Financial Officer James Kavanaugh told Reuters that the new company (NewCo) will have about 90,000 employees and its executive structure will be decided over the next few months. IBM said it expects to record almost $5 billion in expenses related to the separation.

After the separation is completed, each company's dividend policy will be determined by its respective board of directors. (IBM currently pays a quarterly dividend of $1.62 per share)

"IBM is laser-focused on the $1 trillion hybrid cloud opportunity," said Arvind Krishna, IBM chief executive officer. "Client buying needs for application and infrastructure services are diverging, while adoption of our hybrid cloud platform is accelerating. Now is the right time to create two market-leading companies focused on what they do best.”

During a call with analysts on Thursday, Krishna noted how IBM has drastically changed its business lines over the past few decades.

“We divested networking back in the ‘90s, we divested PCs back in the 2000s, we divested semiconductors about five years ago because all of them didn’t necessarily play into the integrated value proposition,” Krishna said.

In recent years IBM has seen a slowdown in sales of software and only seasonal demand for its mainframe servers – hence the heavy push into cloud computing and AI.

“To drive growth, our strategy must be rooted in the reality of the world we live in and the future our clients strive to build,” Krishna wrote on his blog.

Wedbush Securities analyst Moshe Katri said that by separating into two companies, IBM is “essentially getting rid of a shrinking, low-margin operation given the cannibalizing impact of automation and cloud, masking stronger growth for the rest of the operation.”

Arvind Krishna was the key force behind IBM’s $34 billion acquisition of cloud software company Red Hat last year. Ginni Rometty, IBM executive chairman, said IBM is now positioned to take advantage of “the new era of hybrid cloud.” At present, Amazon Web Services and Microsoft (MSFT) dominate the cloud services market.

Eric Jhonsa of Real Money generally praised IBM’s separation plan.

“The managed infrastructure business -- though said by IBM to have a $60 billion-plus backlog and more than twice the scale of its nearest rival -- is clearly struggling,” he said. “A spinoff that leaves IBM's managed infrastructure business in the hands of a management team that's focused solely on running that business just might help turn things around.”

IBM also said it expects to report diluted earnings per share from continuing operations of $1.89 -- or operating (non-GAAP) earnings per share of $2.58 -- for the third quarter on revenue of $17.6 billion.