Better late than never. That’s probably what investors in International Business Machines Corporation (NYSE: IBM) are thinking at the present time about the company’s decision to break its businesses apart. IBM has seen its share of change over time. Many people remember that IBM used to be in the personal computer and workstation business, and IBM also used to make typewriters and even electric motors before that. Now IBM will soon be able to say it used to be in the IT services businesses.
When IBM announced that it had plans to spin off its managed infrastructure services unit, the stock initially traded up 9.2% to as high as $135.50, but the stock was up a more tempered 5% at $130.50 late on Monday. At issue here is whether or not this really was a “better late than never” story.
24/7 Wall St. has been critical of IBM for years. The story has always been a hard sell to investors and the Dow Jones Industrial Average component migrated from one of the world’s top technology companies a decade ago into what some investors might call a “nothing burger.” Perhaps Ginni Rometty would prefer a different characterization, but IBM was a $200 stock during part of 2012 and the start of 2013 — it was $124.07 prior to announcing its split-up.
It probably sounds commendable that IBM is now finally able to conduct a breaking up of its key businesses. There are more than a few questions here that may still make this difficult for the investing community to handle. In fact, there may be more questions than there are answers as we look out into 2021.
24/7 Wall St. has broken out several areas which are likely to bring the biggest concerns in the coming quarters. There are likely many more areas of concern, one of which was that IBM was already poised to have one of the greatest explosive moves on earnings. One area that needs to addressed without comment is that IBM’s cloud and strategic imperatives simply were not large enough to make for two great companies until it acquired Red Hat.
These concerns have not been ranked and there are obviously many issues that need to also be given consideration.
Backlog Shows Continual Shrinkage
IBM used to report its services backlog with every earnings report. Without getting into when that all stopped, the reason IBM stopped announcing it so prominently was because that backlog had been in decline for years. There were fewer companies in need of expensive outsourced IT professionals to show up in navy blue suits. IBM’s official press release covering the year-end 2015 services backlog of $121 billion. Wedbush Securities had a note in early 2017 showing that backlog was $116 billion.
While IBM’s announcement indicated that the NewCo has relationships with over 4,600 clients in 115 countries, its backlog was shown to be $60 billion. IBM pointed out that the backlog is more than twice the scale of its nearest competitor, but the scope is about half of what it was at the end of 2015 before thinking about what may have been divested, closed or moved around in prior efforts. NewCo is expected to be focused solely on managing and modernizing client-owned infrastructures.
IBM’s Focus in the Cloud
As IBM has refocused strategic imperatives around the hybrid cloud, security, quantum computing, data and intelligence, and artificial intelligence, it did a lot more than just acquire Red Hat for $34 billion in 2019. IBM’s landing page for Ginni Rometty specified that IBM acquired 64 companies during her tenure as CEO and that over 50% of IBM’s portfolio was changed under her tenure. It also noted that IBM divested nearly $10 billion in annual revenue over that time.
Some investors wanted IBM to make this move to split long ago, but one sad reality was that the imperatives might not have been strong enough all on their own without the steady IT-services money supporting their growth. Looking forward, the higher growth IBM is expected to have over 50% of its portfolio in recurring revenues.
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