This morning IBM officially spun out its infrastructure services into a new business called Kyndryl, one that, by the way, has revenue of $19 billion out of the gate as a public company. Whatever you think of this move, Kyndryl is a substantial company, yet IBM still saw itself better off without this considerable chunk of business.
According to an investor presentation provided by the nascent company, Kyndryl sees itself as a consulting arm for legacy companies to help them make the transition to more modern ways of doing business, a mission that would seem to fit with what IBM has been trying to do in recent years with the company in general.
But when Big Blue announced its intentions to spin out this division last year, it was clear that it was looking to move away from legacy business, and it saw infrastructure services as a piece that didn’t fit with CEO Arvind Krishna’s hybrid and AI-focused vision. As I wrote in an analysis of the move when it was announced:
You don’t need to be a financial genius to see where the company is headed. Krishna clearly saw that it was time to start moving on from the legacy side of IBM’s business, even if there would be some short-term pain involved in doing so. So the executive put his resources into (as they say) where the puck is going. Today’s news is a continuation of that effort.
Patrick Moorhead, founder and principal analyst at Moor Insights & Strategies believes both companies will ultimately benefit from the separation. “IBM was one of the last companies to spin out its lower-margin, lower innovation services companies. I think IBM will benefit most from [the shift in] focus in that it doesn’t require any more executive time [on this division] and it can now focus on growth areas,” he said.
Regarding Kyndryl, he says the newly formed company can begin to pick and choose where it wants to concentrate from a business perspective with more freedom than it could under the IBM umbrella. “Kyndryl can be more successful on its own as it can spend money on R&D like automation that actually benefits [the business]. Mature businesses require a different kind of investment,” he said, and as a separate company it can begin making those kinds of key decisions.
Holger Mueller, an analyst at Constellation Research, points out that Kyndryl starts off with a big head start in the market. “[Spinning out Kyndryl] is a key move for IBM to find growth again and to be more profitable going forward, which drives valuation. Kyndryl now has to show it can produce results on its own, and given it has been gifted a number of long-term contracts from IBM, that should not be an issue,” he said.
While Kyndryl will be fine for the short term, at least based on its existing contracts, it remains to be seen if the company can flourish on its own in the longer term in a changing technology landscape. Regardless, IBM is free to concentrate on its new vision, and while it will probably miss the revenue initially, it should benefit eventually from this arrangement.