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International Business Machines Corporation (IBM): All You Need to Know About the Spin-off of Infrastructure Services

International Business Machine Corporation (IBM) is a technology and consulting major headquartered in New York. It began operations in 1911. As of 2019, it was one of the largest employers in the world. It is engaged in Enterprise Applications, Network Services, BPO Services, Technology Consulting and AI Consulting and Cloud Computing. Recently IBM announced a spin-off of its managed infrastructure services as a new unit.

Financial Results
IBM announced Q3 results in October 2020. Its revenue has decreased by 3% in the said quarter. The net income has also reduced by 3% and now stands at $2.3 Billion. Its GAAP Operating Margin increased by 1.8% to 48% in Q3. IBM generated $1.1 Billion cash flow in this quarter and now has total cash of $16 Billion. It has paid a dividend of $1.5 Billion in the same quarter. The company has a total debt of $65.4 Billion.

Spin-off of Infrastructure Services

In October 2020, IBM announced that it would spin-off the Managed Infrastructure Services. The stock soared high on this announcement. The objective is to divest the IT services and focus on Artificial Intelligence (AI) and hybrid cloud business. IBM felt that IT services were not growing at the desired pace.

With this move, it aims to target large companies who don’t want to host data with public cloud companies like Amazon Web Services and Microsoft Azure. The company feels that in the future, more than half of the revenue will come from cloud computing.

The spun-off company is called NewCo for now. NewCo will have more debt than IBM, but still, IBM will be able to manage the debt with ‘A’ credit- rating.

The shares of IBM will be split. The investors will have to hold shares of both companies as a combined quarterly dividend will be paid. It will not have a negative impact on investors. The spin-off will complete by the end of 2021.

Other Developments

Focusing on the objective of increasing its presence in AI, IBM had partnered with CBSE, the national level education board in India, to integrate AI curriculum for grades XI and XII.

With the spin-off, IBM is focusing proactively on Cloud computing and AI, the high revenue earning areas. The fall in revenue and net income can be attributed to the pandemic as its main markets are the US and Europe. The stock has not shown much volatility. At the close of 3rd November 2020, IBM was trading at $114. There is a positive sentiment. All these factors make IBM a good stock for the investor.

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