IBM to Spin Off Services Unit to Accelerate Cloud-Computing Pivot

Cristopher Centers

International Business Machines Corp. is planning its biggest-ever business exit, spinning off a major part of its information-technology services operations to accelerate the 109-year-old tech pioneer’s focus on faster-growing businesses like cloud-computing and artificial intelligence. The move IBM announced Thursday would separate its unit that manages clients’ IT infrastructure and […]

International Business Machines Corp.

is planning its biggest-ever business exit, spinning off a major part of its information-technology services operations to accelerate the 109-year-old tech pioneer’s focus on faster-growing businesses like cloud-computing and artificial intelligence.

The move IBM announced Thursday would separate its unit that manages clients’ IT infrastructure and accounts for nearly a quarter of its sales and staff. But the business has shrunk as customers have embraced cloud computing and has become an earnings drag for Big Blue.

“We are redefining the future of IBM and where we will put our focus moving forward,” Chief Executive Arvind Krishna said Thursday. The company, he told The Wall Street Journal, has seen major growth in client numbers and large deals in cloud computing, proving it could be competitive there.

IBM said it would separate operations that generated about $19 billion in sales over the past year, have about 90,000 employees and a backlog of $60 billion. IBM reported $77.15 billion in total revenue for 2019 and 352,600 total employees.

Investors welcomed the news, sending IBM’s shares up nearly 6% in Thursday trading. The stock had been down 7% this year through Wednesday’s close, lagging cloud rivals that have seen big gains during the pandemic with companies shifting more work online.

Microsoft Corp.

shares are up more than 30% and shares in online retailer

Amazon.com Inc.,

the largest cloud-services provider, are up more than 70%.

The move marks one of the biggest shifts in the history of a company that has taken other major pivots. Once synonymous with the personal computer following the debut of the IBM PC in the 1980s, it sold its operations to China’s

Lenovo Group Ltd.

in 2005 after falling behind more nimble rivals such as

Dell Technologies Inc.

In 2014, it exited its unprofitable semiconductor business, paying $1.5 billion to GlobalFoundries Inc. to take over the operations.

But none of those transactions was as large in scale relative to IBM’s size as the spinoff announced on Thursday, which would fundamentally alter the makeup of one of America’s oldest and most iconic technology companies.

The IT services operations that IBM is now partly shedding were central to former Chief Executive Lou Gerstner’s drive in the 1990s to transform the company from a lumbering tech giant focused on computing hardware to a huge player in services that were booming at the time.

The spinoff announcement comes a few months after the Armonk, N.Y., company said it was cutting an unspecified number of jobs in the first major workforce reduction under Mr. Krishna. He assumed the role in April and is trying to revive growth at the tech company. The layoffs were made against the backdrop of the Covid-19 pandemic, which has caused many IBM customers to dial back investments and hold off on big software deals.

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Even before the health crisis, IBM has been struggling through a yearslong effort to reposition the company. Sales have fallen around 25% in the past eight years, and the company trails the likes of Amazon.com and Microsoft in cloud computing—where companies rent rather than buy computing horsepower.

Shedding a legacy business that is performing poorly at a time when IBM’s clients are adopting cloud computing is probably a wise bet, said Daniel Elman, an analyst at Boston-based Nucleus Research. “They were late to the cloud party, and this is now them doubling down and saying this is the direction of the company,” he said.

IBM signaled its focus on the cloud with the appointment of Mr. Krishna as CEO after his predecessor Ginni Rometty—now executive chairman—struggled to inject growth. Mr. Krishna ran the company’s cloud and cognitive-software division. IBM also named Jim Whitehurst—CEO of Red Hat, the open-source software giant that IBM acquired for about $33 billion last year—as its president, the first time in decades it has given an executive that singular title.

IBM has been trying to capitalize on what it calls the hybrid cloud, which companies use to manage software and other systems across different cloud services and their own data centers. IBM saw the deal for Red Hat, which was the most expensive in its history, as an opportunity to gain on competitors in cloud computing.

The technology-services division that encompasses the unit to be spun off has been a headache for IBM for a while. Sales in the entire services division fell 6.1% last year, though it remained IBM’s largest by revenue at roughly $27.4 billion—or about 35% of the company’s total.

In April the company recorded a $900 million charge against earnings, largely to cover restructuring costs linked to the services division. The company in January had signaled it was planning changes at the unit to bolster its competitiveness.

Mr. Krishna said the business being spun off, though lower margin, would have an investment-grade credit rating and also growth opportunities. It would go up against rivals such as

DXC Technology Co.

and a broad array of more regionally focused tech-services businesses, some of which could provide partnering opportunities.

IBM said Thursday the yet-to-be-named company already has relationships with 4,600 clients in 115 countries and operates in what it sees as a $500 billion market. The new company would be able to partner across all cloud vendors, providing the opportunity for stronger profits and cash generation, IBM said. The separation is expected to be completed by the end of 2021.

IBM opted for a spinoff to have certainty over the timing of the separation and provide customers certainty over what would transpire. Mr. Krishna said the company would be open to an acquisition offer for the businesses as long as it didn’t jeopardize those criteria.

In connection with its plans Mr. Krishna said IBM expects to record $2.3 billion in accounting charges by the end of the year.

The company Thursday also reported third-quarter profit and revenue that were roughly in line with Wall Street’s expectations. For the September-ended quarter, IBM posted preliminary earnings from continuing operations of $1.89 a share, or $2.58 a share on an adjusted basis, on revenue of $17.6 billion. The company said it would release its full quarterly report later this month.

Mr. Krishna said IBM remained committed to a sustainable and growing dividend.

Write to Asa Fitch at [email protected] and Dave Sebastian at [email protected]

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