By Asa Fitch
International Business Machines Corp. Chief Executive Arvind
Krishna is betting on the well-practiced gambit of a corporate
divorce to revive the former corporate icon. But tech history shows
the outcome can be disappointing.
The plan to spin off the unit that manages clients'
information-technology infrastructure and had around $19 billion in
annual sales would likely represent one of the biggest corporate
separations in recent years, according to Dealogic data. But like
many others, it comes with execution challenges.
Following the deal, IBM would have a further $2 billion or so in
business it currently does directly with clients passing through
the new company, and those sales could be in jeopardy if the split
is executed poorly, said Lisa Ellis, analyst at MoffettNathanson
LLC.
IBM plans to spend 12 to 14 months to carve out the new business
it has pledged to establish with an investment-grade rating.
Setting up the new publicly traded entity will involve about $2.5
billion in costs, the company said. Resolving the structure and
operations of the new entity -- as well as its name -- are still
being addressed, Chief Financial Officer James Kavanaugh said.
"We've got a lot of work ahead of us," he told analysts
Thursday.
The plan was broadly well-received by investors and analysts.
The stock rose almost 6% on Thursday, though it retreated
Friday.
Through the split and a big bet on cloud computing, Mr. Krishna
is trying to inject growth after a lost decade during which the
109-year-old company fell behind rivals. IBM has suffered 29
quarters of year-over-year revenue declines over the past 10 years,
and the company said Thursday that it expected to report
third-quarter results that indicate another drop in sales. Wall
Street projects a retreat in the current quarter as well, according
to analysts surveyed by FactSet.
The company will lose another several billion dollars in
quarterly sales with the spinoff, although it could help IBM to get
back to top-line growth by ditching a business that has been
shrinking.
Mr. Krishna, who became chief executive in April, on Thursday
pledged the spinoff would help drive sustainable growth for IBM.
The company, since Mr. Krishna took over, also acquired cloud
cybersecurity business Spanugo and a Brazilian AI software company
known as WDG, to sharpen its focus on areas where it sees
growth.
The move, to some observers, is long overdue. Much like other
major IBM business exits, this one is happening too slowly and too
late to help the company recapture its past glory, said Erik
Gordon, a professor at the University of Michigan's Stephen M. Ross
School of Business.
"Over and over with IBM, they're in a business that seems smart
to get out of to everybody but IBM's management," he said. "So they
change the management, and then they get out of it."
Boyar Research, in a study last year of 246 spinoffs, found that
in most cases the outcome was disappointing. Such companies
generally did well in their first year, the New York investment
research firm said, but after five years, just over a third were
performing better than the S&P 500 index. Parent companies
mostly did poorly in the five years after spinoffs, the study
found, and on average shares in the parent trailed the stock
index.
Other tech companies have found that a split isn't a quick fix.
Hewlett-Packard, another company with a storied history, split off
its server and corporate-services business in 2015. The new
company, called Hewlett Packard Enterprise Co., has underperformed
the market, and its revenue has declined. Although HP Inc., the
former parent, has faced its own challenges, it has managed to grow
and enjoyed a boost during the pandemic that has fueled demand for
laptops and at-home printers.
The online auction site eBay Inc. in 2014 decided to spin off
PayPal Holdings Inc., in a move that was widely seen as positive
for both. PayPal's fortunes have soared since the split, with its
stock more than quintupling. Last year eBay faced renewed pressure
to sell assets as its shares languished. It agreed to sell its
StubHub events ticketing business last year and more recently its
classified-advertising business.
IBM has experience with shedding businesses to reinvent itself.
The company was a pioneer in personal computers, but exited under
pressure from more-nimble rivals such as Dell Technologies Inc. IBM
sold its PC business to China's Lenovo Group Ltd. in 2005 for $1.25
billion, a deal widely regarded as shrewd.
IBM unloaded its semiconductor manufacturing business to the
chip maker Globalfoundries in 2015, an acknowledgment, some
analysts said, that it didn't have the scale or focus to compete in
that arena.
Now IBM is exiting a business in a market that has uncertain
fortunes. IT services, which include infrastructure services, will
decline by 6.8% this year, although the sector is set to rebound
next year, according to the research firm Gartner. Mr. Krishna said
the business IBM is spinning off will be the largest player in the
field and will be vying for a market worth $500 billion, with
operations in more than 100 countries.
For the long term, Ms. Ellis of MoffettNathanson said, it is the
right move, giving each business more flexibility to satisfy its
particular customers.
"It's like a good divorce," she said. "Painful to get through
and expensive, but ultimately the two entities are better off
separate from each other."
--Dave Sebastian contributed to this article.
Write to Asa Fitch at asa.fitch@wsj.com
(END) Dow Jones Newswires
October 10, 2020 14:27 ET (18:27 GMT)
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