IBM evolves once more

• Global
• IBM, Information Technology, Spin-off, Tech, Technology, Unbundle
• October 8, 2020

As you probably know, IBM is one of the original tech companies. The company can trace its roots back to 1911, admittedly to a time when it manufactured and sold machinery including commercial scales and cheese slicers.

There’s a well-known saying in the corporate world: “Nobody gets fired for buying IBM.”

It means that IBM was such a safe bet that there was plausible deniability if a corporate department elected to go with IBM and something went wrong.

“I hired the best; I can’t be responsible for this.”

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It’s remarkable that any company can build a reputation like this. It’s worth spending a couple of minutes learning more about one of the world’s most important computing companies.

A Great Depression, a World War and much more

The name International Business Machines (IBM) Corporation was only adopted in 1924. The business went on to survive The Great Depression as well as World War II, adapting along the way. The first steps towards computing were only taken during the war, as the first machine capable of executing long computations automatically was built. It weighed five tons.

The floppy disk. Heart machines. The earliest form of the ATM. IBM has an illustrious history of game-changing products, but perhaps the IBM Personal Computer (PC) in 1981 tops them all. The processing chip came from Intel and the operating system (DOS) came from a 32-person company known as Microsoft.

IBM. Intel. These companies are the genesis of computing as we know it today, yet their market caps have been dwarfed by the modern Big Tech players.

Despite such a proud history of adapting and innovating, IBM faltered. Intel is being given a hard time by NVIDIA.

IBM’s market cap is now around $115bn. Intel’s is around $225bn. Facebook is more than double the size of IBM and Intel combined, but is less than two decades old.

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IBM has considered a split before

In 1993, IBM suffered a record net annual loss of $8bn. That’s an astronomical number by today’s standards, let alone in 1993. The irony of the introduction of the PC was that purchasing decisions shifted into the hands of individual consumers, rather than those with whom IBM had long-standing relationships.

New management came in and considered splitting IBM into separate, independent companies, but eventually decided against it. In fact IBM did the exact opposite, going on an acquisition spree and focusing on integrated solutions.

After so many decades of change and external challenges, it’s taken the development of cloud computing and AI (Artificial Intelligence) to finally split IBM.

IBM looks to the future

IBM will split into two by spinning off its infrastructure services unit into a separate public company. This will give investors the choice to buy into IBM’s legacy IT infrastructure business, or a business focused entirely on AI and hybrid cloud (which will retain the name IBM). Or both, obviously.

It’s interesting that the IBM name will be retained by the business with stronger growth opportunities (but arguably riskier). It demonstrates that executives would rather see the IBM name taken forward in an evolution of the company, than attached to the legacy business that it is synonymous with.

IBM has done this before. In 2005, IBM got rid of the PC business that made it a household name.

The CEO of IBM has described the AI and hybrid cloud business as a $1 trillion opportunity. No wonder that’s where the IBM name is headed.

The infrastructure business will almost certainly trade on a much lower multiple than IBM, but should be a fairly dependable payer of dividends in the medium-term. Expect to see institutional investors with medium-risk mandates on that shareholder register, while high-risk growth funds climb into IBM.

The IBM share price initially jumped nearly 9% on the news before cooling off to be 4.9% up at time of writing. The market clearly likes the strategy.

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