IBM Split Doesn’t Guarantee a Speedy Recovery

International Business Machines Corp. IBM -2.81% 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., HPQ -0.15% 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. EBAY 6.47% in 2014 decided to spin off PayPal Holdings Inc., PYPL 2.18% 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 [email protected]

The post IBM Split Doesn’t Guarantee a Speedy Recovery appeared first on WSJ.

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