I'm not a business person so forgive me if this is a dumb question. But if you have a company with an underperforming segment and you split it into two so you can spin off the worse half... what does that mean for the new company that represents that worse part? I can obviously see the upside for the business that jettisons the dead weight.
But the dead weight is a company too. Does everyone who ends up working there just sort of accept that now they work at a company with worse financials and prospects?
It's not really a "worse" part that's "dead weight".
Companies split when two halves just have such vastly different objectives and futures that, at an organizational practical sense, it no longer makes sense for the same board/CEO/management to be running them together.
Splitting them up lets both halves select boards/CEOs/management that is best for them, and pursue strategies that are best separately. The "underperforming" segment may now perform better now that it's free to use AWS/Azure/Google cloud tools instead of just IBM's... it can enter into strategic alliances it couldn't before... it can merge with another company that wouldn't have made sense before.
As for the people who work there... they're still employed so nothing really changes day-to-day.
But the main point is that this frees the "worse part", if you still want to call it that, to do what is best for it. It may very well turn out to thrive and be a huge success. It's still a normal business like any other.
If it were truly dead weight it wouldn't be spun off -- it would be shut down and everyone would be laid off. The fact it's being spun off or split means it's expected to be a viable business on its own. Nobody can predict the future -- who knows, it might outperform the cloud part long-term.
>> The "underperforming" segment may now perform better now that it's free to use AWS/Azure/Google cloud tools instead of just IBM's...
The contrary point of view is that this means that either:
1. crapIBM will need to pay betterIBM for access to continue using the ERP, QRadar, Remedy, licenses, etc tools they use today. This is better for betterIBM and worse for crapIBM
2. crapIBM will need to stop using betterIBM's tools, and have to quickly negotiate new licenses/tools and spend 6+ months of their first fiscal year just moving platforms (moving SAP has often been a 2 year failed IT challenge, good luck). This will make crapIBM continue to look worse, making betterIBM's leadership look good for divesting themselves of it.
When a company is spun off, oftentimes the parent company still continues to own a minority stake, and/or shareholders will wind up with shares in both.
It's in nobody's interest for "betterIBM" to succeed at the greater expense of "crapIBM". With so much shared ownership (at least in the medium-term, practically speaking), shareholders want both to succeed.
That's the whole point -- shareholders think both halves will do better as separate entities, and it's in nobody's interest for one half to exploit the other.
Surely your "crapIBM" will continue to have access to "betterIBM"'s tools at a reasonable price, but they'll also be free to migrate to better ones, as they choose, at the pace that is most profitable for them.
It's win-win because that's the entire point of the split in the first place. The two resulting entities aren't even competing with each other, they're in totally different markets.
I used to work for IBM. When working on customer engagements the services teams are required to pay for IBM software that it uses. This goes back to the consent decree with the Justice Department after the anti-trust investigation in the late 70s. So splitting up won't effect that.
Why couldn’t they just agree to let each other use the other’s tools for free / massive discount for some limited period, or even in perpetuity? It doesn’t have to be one company shafting the other?
> Why couldn’t they just agree to let each other use the other’s tools for free / massive discount for some limited period, or even in perpetuity?
A big point of splitting up is so that (in both directions, to the extent that it applies) cross-unit costs aren't baked into operations. Subsidies like you suggest directly undermine that.
Even if they 'spun off' businesses, they still have transfer pricing schemes among each and every subsidiary of Alphabet. This is just BAU for small and large organizations
> Interesting, Google spun off many companies under Alphabet umbrella, but essentially continues to provide base tooling/compute/IT support to them.
Those aren't actually spinoffs in the sense of what IBM is doing; "Google" was effectively just renamed "Alphabet", with its core business in a new subunit called "Google". They are all still within the same corporate ownership structure. Its an internal organizational change, not a separation into separately-owned organizations.
Sure, it's a bit more complicated, but the point here is that Waymo remains an Alphabet subsidiary, external investors are investing under that understanding and with full knowledge of Alphabet’s control of Waymo (which is why the blog entry you link to links to the Alphabet 10-Q reporting the external investments and the resulting “noncontrolling interests” in the subsidiary.
A “spin-off” within a common corporate umbrella is a different thing done for different reasons than a corporate divorce kind of spin-off like IBM is doing.
Sure, but you could do something to ease initial shock?
Like: We'll give you an 80% discount in the first quarter, and the discount goes down by 20% per quarter, eventually you'll either be negotiating your contracts with us like any other potential customer, or you'll have moved off to some other platform.
As a shareholder you may require the business to guarantee that every deal negotiated with customers and suppliers are defined on an arm's length basis or face negligence or wrongdoing.
Every holding has transfer pricing [1] as BAU, and I can assume that it is also the case for IBM
There is a lot of financial engineering that goes into situations like this and you have to look into it on a case by case basis. But often times investing in spinoff companies can be very profitable. In fact spinoff companies outperform the overall stock market - you can checkout the Bloomberg Spinoff Index.
The book How to be a Stock Market Genius covers situations like this and gives some tools to analyze them if you are interested in learning more about it.
Large conglomerates like IBM usually trade their shares at a discount because they're poorly managed due to the sprawling size. Breaking businesses with little synergies usually makes the separate pieces better managed and thus more valuable.
They have a conflict of interest between the groups.
The "Cloud/AI" group wants to sell the new buzzword products.
The "Infrastructure Group" wants to sell the low innovation commoditized services and products.
The sales people from both groups would be telling opposite stories on why you should go with them for your IT needs. So it is easier to split them up and let them compete in the market rather than compete internally . And it probably makes both markets bigger in the long run because they can focus and expand.
Not sure.. The business model is really hybrid cloud with cloud being the endgame. As a traditional mainframe customer you want your application to work both in house and in the cloud. If you can move everything to the cloud and it's managed for you, you don't really need IT services anymore.
They can be bought or they can buy other companies that are specialized in the same area for synergies. Also it is generally easier to manage smaller organizations so the underperforming half here could become a bit nimbler. Generally speaking it helps when people have some clear focus were it a company or life in general.
I'm not saying that these all are necessarily true here. Time will tell. And about the people, if the culture was bad before it would stay the same regardless. If it takes a turn for worse, then I guess it was inevitable either way.
I know a couple of people who are in the process of riding companies down, so to speak. They’re pretty close to retirement (if not already able to retire), they like their coworkers, and are comfortable where they’re at. They’re happy to man the ship as it slowly sinks. This might be the case for a good many IBM’ers on the “underperforming “ side.
Weirdly, I feel about the same but the downgoing part only started around 2015. We met once at a company you were doing due diligence at, so I happen to know that you are about 15 years older than me. Maybe it's just an age thing and we're getting grumpy? :)
After all, complaining about the state of the world decaying goes back to at least the ancient Greeks.
I was thinking of one of those, it's a shame they apparently did not say it. However, I recently learned that the Torah apparently also claims that each generation is more degenerate than the last so perhaps I can fall back onto that :)
Oftentimes it's more like a corporate equivalent of divorce.
There are distinct, often contradictory interests. Each half figures it's the other one dragging them down, which might be true completely, partially, or not at all. And it's clear who has their head in the clouds in this case ;)
The HP / HP Enterprise split a couple of years ago is another example of this. Their messaging at the time wasn't so clear, but it became obvious they were divorcing the successful printer/office segments from the struggling enterprise ones.
> But the dead weight is a company too. Does everyone who ends up working there just sort of accept that now they work at a company with worse financials and prospects?
I was on the HPE side - pretty much! This typically doesn't come as a surprise, though. The free swag with the new company logo makes it a little better, though.
What was awful was that HPE had some solid products and could have been a great company, but management at all levels was so bad. I was at an HP partner at the time and it was years of watching a train wreck as they muddled along running their acquisitions into the ground.
I was also thinking about HP, but a considerably earlier split, when Agilent was spun off in the late 1990s. I think the motivation was the same, to divorce the dynamic printer/PC segment from the stagnant electronics segment.
But many people at the time thought Agilent was more in line with traditional HP values than HP was, and over the long run, they appear to have performed better than HP.
It's not underperforming segment. It's just naturally lower margin business segment. Splitting it off to new owners and CEO's who are interested developing the business to different directions increases the value of that business.
IBM has done this before. They sold personal computer business to Leonovo in 2005.
It's more like dumping a great business making a lot of money to focus the company on the sexy hot thing with higher projected growth that will hopefully attract a much higher stock valuation.
> what does that mean for the new company that represents that worse part? I can obviously see the upside for the business that jettisons the dead weight.
As someone who used to do a bit of recreational "special situations" investing, I can say with some confidence that counterintuitively the worse part is often the better part, and the "dead weight" often soars after it is jettisoned vs the "good part" flatlining. Not always but it can definitely happen.
The reason for this is logically apparent when you think about the second-order effect of people's opinions on a stock valuation. Say IBM has two halves: "Cloud IBM" which is funky and "Boring IBM" which is everything else. As one company the valuation is the weighted average of everything everyone thinks about the funky part and the boring part put together and is therefore fairly boring overall.
So when you do a spinoff the funky cloud part should soar, right? Wrong. Or not always, anyway.
What often happens when you split a business into a good part and a "bad" part is that all the overinflated expectations of investors are concentrated in the funky part so at the time of the split it has a very high valuation and the boring part is massively oversold and undervalued. So after the split the boring part performs well even if it just phones it in because expectations are so low whereas the funky part needs to do amazingly just to meet the expectations of people who are already in the stock at a valuation that is too high.
> As someone who used to do a bit of recreational "special situations" investing, I can say with some confidence that counterintuitively the worse part is often the better part, and the "dead weight" often soars after it is jettisoned vs the "good part" flatlining.
Often, the “good” part is actually the high-risk, high-growth potential part and the “bad” part is the low-risk, solid returns part.
Exactly. And if investors have already priced in the high growth potential, sometimes even if the "good part" grows a lot it can be that it doesn't grow enough to justify the valuation.
Fair to add that this doesn't refute the structural logic of seperating the parts - if your business has two halves that are that different, a split can make total sense.
I read the article and it doesn't make sense to me, but I wouldn't expect it to, as I know next to nothing about business. I however expect this to be similar to the Siemens/Infinion Technologys split a number of years ago: there might have been administrative reasons, but at least as important was the appearance to potential investors. Siemens (and IBM) are huge, diverse, slow moving entities with comparatively stable outlook and correspondingly low expectations of gains, while Infinion (and the new former IBM Cloud entity) are younger, more specialized, riskier, but potentially much more profitable companies, which attract a different crowd of investors / investing strategies.
There is a very real risk that companies spin off completely dead weight (see Honeywell's spinoff of Garrett). eBay spinning off PayPal a few years ago is an example on the opposite end. Assuming the management team is acting in good faith, it usually is because the two divisions lack synergies and have different potential growth trajectories and paths. For instance, the fast growing division might not be able to spend enough money because investors view the overall company as a slow, stable grower while the stable division is upset that the fast growing division is sucking up its profits to grow. In cases like these, it might not be a dead business, but something like eBay.
Honeywell divested from the defense sector a couple decades ago, spinning off "Alliant Techsystems" and sending debt along with the new company. ATK went on to be successful, merged with Orbital Sciences as equals (2015), and then was acquired by Northrop Grumman (2018). Financial Engineering, as one commenter put it, is quite nuanced and interesting.
There's a lot of talk about how this is supposedly a good idea for both sides, but here's what actually happens:
The people working in the "lesser" part take a very close look at who the new management is, and what their market chances are. The most likely outcome here is "meh".
At that point, most career-hungry people who have contacts in the other side of the company start extending feelers, because it's better to be in a growth area than in a steady ship if you want to have quick career growth. The few who've also got contacts outside the industry weigh the rest of the industry for their prospects.
Meanwhile, middle management isn't stupid and knows this is happening. Large turf wars break out, everybody trying to secure the most interesting projects for their teams so they can attract the best remaining people. The resulting office politics drive most of the remaining people who have options outside to leave as well, because it's a cesspit.
At this point you have created a solidly mediocre company. It'll likely plod on for a long time, on a slow downward slope. Every calculates what comes first, implosion or retirement, and chooses accordingly.
Life is, for lack of a better word, solidly grey.
But sure, on paper it's a great opportunity for both sides.
Currently working in what some have called "crap" IBM. And you are describing the initial reaction amongst many of my colleagues. Except those in India. The general consensus is IBM will do as it has done for years. Instead of fixing problems and making things more efficient or better, the new "crap" IBM will simply ship allot more jobs to India to achieve profitability.
fwiw: I don't think there's necessarily a "crap" company coming out of this. That's what I was referring to when I said people will take a close look at the new leadership. Sometimes, a split makes sense. But, based on past experience, the balance of probability points to not getting a good leadership team, and things flow from there.
It does not directly answer your question, but an illustrative example is DuPont's spinoff of Chemours in 2015.
Chemours was loaded with "assets" like dangerous chemicals, and their accompanying lawsuits. (One phrase used in a later lawsuit was: "unlimited exposure for historical DuPont liabilities")
Chemours' market cap was initially valued at $3b and quickly crashed to $0.75b. But then Trump was elected, it started looking like the liability from dangerous chemicals would be less than previously believed, and eventually this company, which was designed to fail because of open-ended liabilities, was valued as high as $10b.
But the dead weight is a company too. Does everyone who ends up working there just sort of accept that now they work at a company with worse financials and prospects?
But the dead weight is a company too. Does everyone who ends up working there just sort of accept that now they work at a company with worse financials and prospects?
Edit: All the replies are fantastic. Thank you.