I have not written much about IBM Corp. (NYSE:IBM) in the past. I just did not find much interesting about what was going on there.
I wrote about IBM last July 2019 at a time when they were making some changes as a result of their acquisition of Red Hat, an open source software firm.
Today, I focus on IBM because it announced that it is spinning off its infrastructure business so that it might become a more focused organization. This is a major change for the company and has important implications for the future.
The acquisition of Red Hat was led by IBM CEO Ginni Rometty, a move that really seemed out of line with what she had been doing in her previous seven-year term at the helm of the company. As I reported at the time, the purchase was referred to as a “transformational acquisition,” one that would lead to a change in what IBM was.
It was not altogether clear what the direction of the company would be in the future.
Well, Ms. Rometty remained the CEO of IBM until this April, six months ago, when Arvind Krishna moved into the CEO position. Ms. Rometty, at that time, became executive chairman of the company.
Mr. Krishna joined IBM in 1990, at IBM’s Thomas J. Watson Research Center, and in 2015 was promoted to senior vice president of IBM Research. He later became senior vice president of IBM’s cloud and cognitive software division. He has a Ph.D. in electrical engineering.
This first major action of Mr. Krishna’s will substantially shrink the company and allow it to become more focused in the future. The picture that is drawn is that IBM will focus upon cloud computing and the AI business. It will, according to management, work in the “hybrid cloud”, to assist companies manage software and other systems across different cloud services and their own data centers. This direction was substantially helped by the acquisition of Red Hat.
In effect, IBM is shrinking according to a well-thought out plan.
Note that IBM is not the only “legacy” firm to move in this direction. General Motors (NYSE:GM), under the direction of Mary Barra, is also “shrinking” its business in order to gain focus. GM was one the largest producer of cars in the world. Now, it is number three, and Ms. Barra does not seem concerned that it might drop lower.
Here, we see some of the “legacy” firms realizing that the age of the conglomerate is over and that smaller, more focused is better… a lot better.
Mr. Krishna is moving in that direction, as is quoted as saying, that “this is a landmark day,” for the spinning off of the infrastructure business is “redefining the company.”
The Change Being Made
The business being spun off generated about $19 billion in sales over the past year, versus a reported $77.15 billion in total revenue for the whole company. IBM will be losing about 90,000 employees and a backlog of business that amounts to $60 billion. In 2019, IBM had about 352,600 employees.
The part of the company being spun off had become a drag on performance of the whole organization.
As a consequence, the company’s revenues “have shrunk in 29 of the last 33 quarters”.
The future is a smaller, but much more focused company. The initial reaction of the stock market was an increase of 8 percent in the IBM stock price. The outlook for investors is positive.
Stock Performance Over The Past Three Years
The price of IBM stock in recent years has been pretty pathetic, especially given all the new, historic highs that the market itself hit.
On October 15, 2017, IBM stock closed at $160.90. On October 11, 2019, IBM stock closed at $142.70. On February 7, before the stock market dived due to the coronavirus pandemic, IBM stock was selling at $143.41, and during the dropoff, the price hit a trough of $94.77 on March 23.
On October 7, 2020, at the close of the market, the IBM stock price was $124.07.
All-in-all, a pretty dismal performance.
Note, again, that Mr. Krishna became CEO in April, after the trough was hit. Also, note again that Mr. Krishna has been with the company since 1990, so he is not a newbie to the company, a company where I argued on February 9th of this year that “the executives of the company and the board of directors just don’t get it.”
“The efforts of the company over the past ten years have done little or nothing to bring some of the traits of the ‘new’ Modern Corporation to IBM. And, the efforts that have been made, such as the effort to bring IBM more into the cloud computing space, and which included the acquisition of Red Hat, have not yet produced many results.”
The earnings performance and the stock market performance of IBM have reflected this failure.
But Ms. Rometty’s move to acquire Red Hat, in the largest deal that IBM has ever done, and Mr. Krishna’s move to spin off the infrastructure business represent a good start. Shrinking the company by 25 percent and by focusing just on hybrid cloud computing assisted by the appropriate AI efforts will limit what the executives can do.
So, maybe, IBM is on an appropriate path.
Of course, we need a little more evidence that this is the case. It certainly seems one way to make the company “modern.” Just ask Mr. Barra at General Motors.
A further plus might be that the reduction in size is just the right thing to do as the economy sinks farther into the recession and the associated “crisis” that might accompany it.
Whatever, IBM may turn out to be something investor might want to take a further look at going into the future.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.