We divested networking back in the ‘90s, we divested PCs back in the 2000s, we divested semiconductors about five years ago
Is it just me or does anyone else feel over the decades they've been divesting some of the best (long term) building blocks? A company with vertically integrated silicon, compute, networking, cloud, AI, Enterprise etc. seems like it could have such an edge if only they had focused those engineering capabilities on consolidated, high-margin end products.
I see the other big players going the opposite direction. e.g. Google and Amazon are building their own silicon for an edge in Cloud and AI.
So-called SexyIBM is just another cloud company without a distinguishing barrier to entry. Sure, their growth will look good on paper for a few years, but when Cloud becomes commoditized (which I think is already happening), the capabilities which could have created the kind of real innovation that opens up whole new industries will have all been cleaved away.
Can you elaborate on that? I worked for IBM for a little more than a year and it was deeply disturbing, but I don't really understand what's happening under the hood.
IBM used to be an engineering-first company. But people are expensive and engineers are some of the most expensive people there are. So when the bean counters took over IBM, they decided to get rid of their expensive people and replace them with cheap, fungible labor. Then IBM embarked on a series of experiments about how they could continue to make money with said cheap labor. This is the result.
Hard to create value when ditch or reduce power from the value creators and end up nothing but value extractors.
Companies taken over and run by value extractors (finance/business/marketing) over the value creators (engineers/product/creatives) end up in this stagnated, picked apart state when the grace from the value creation or product wears off.
Value extractors need to learn that you must first create value before you extract it. The reason value extractors originally were attracted to the project/product is usually that it has created value.
R&D has very little value to an MBA so it is cut, but long term it is all the value of the company. Value extractors kill the whales before they even can grow up.
Very well put. The same management philosophy happened to Boeing, and I think more quietly to many companies thought too big to fail in the last 50 years.
I think they have enough money that they no longer have to take a risk in research and development. Their strategy is to wait to see what companies are coming up or have a good position of a sector , then they buy them out. Less risk , less overhead, and lower salaries for them to not innovate internally . Plus they get a new client portfolio from the acquisition and new talent.
Having worked for IBM and being a client of IBM in the past with large gov't agencies , i can also tell you that part of their success is liability perspective from the client. I know many of gov't big wigs who simply hired IBM not because of their talent but because if TSHTF they covered their arses with congressional hearing or lawsuits by saying what more could we do than hiring the vendor that made the product.
> Is it just me or does anyone else feel over the decades they've been divesting some of the best (long term) building blocks?
IBM is old enough to understand the pitfalls of that approach.
In year zero it sounds great. Integration! Efficiency! And that works for a bit.
Then internal politics causes you to pass on opportunities that competitors take because taking them yourself would cannibalize sales in one of your other lines of business.
Then somebody else comes up with a better microprocessor than you, or better software, or lower cost manufacturing, and it's going to take your internal team five years to catch up. In the meantime all your systems are integrated with your in-house solution, so you can't switch, but the deficient in-house alternative makes you less competitive, so you lose all the customers who can switch easily.
Then you have to cut R&D because of the lost revenue and fall even further behind the competition, which leaves you in a death spiral where the most profitable strategy is to lock-in your existing customers and milk them as hard as possible as you circle the drain.
Or you can concentrate on doing one thing and doing it well, so that you don't risk sinking your entire operation as soon as you fail to execute flawlessly in any one of the six different major fields you've created an internal dependency on.
Yeah, successfully vertically integrated companies like Apple choose very carefully which things they integrate vertically and which things they don't. Apple silicon for example isn't truly apple silicon. They still cooperate with a company for the manufacturing. Apple still buys gorilla glass from Corning, etc.
And in the areas where they do compete, they pour in top dollar to make actually competitive products.
IBM is a very capable company when it comes to technology R&D. But they've always seemed to struggle to develop those capabilities outside of high-end consulting work.
IBM had the technical chops to create the likes of ARM, nVidia, or any number of big tech companies. They just never seemed to have the leadership capabilities to get out of their comfort zone. I understand the idea of keeping a business focused, but Alphabet and MS don't seem to struggle with managing a diverse portfolio of companies.
IBM failed to leverage their silicon designs for driving down their cloud costs. As long as the IBM cloud runs mostly on third-party hardware they have no sustainable competitive advantage.
I've been trying to figure out whether the mainframe business is being spun off or retained as part of this split. Haven't been able to figure out whether IBM even manufactures this equipment. I know they outsource the chip fab now. I'm not even sure what the mainframe is called any more, they seem to change the name every couple of years. IBM Z? zSeries? System Z? Something with a "Z" in it I think.
> We divested networking back in the ‘90s, we divested PCs back in the 2000s, we divested semiconductors about five years ago
Motorola followed that path. They sold off their computer business in the early 1990's. Analog electronics (On Semi), and then the semiconductor business (Freescale, now NXP). Finally, they split the government biz (Motorola Solutions) from the phones, and that was first sold to Google, and what remained then went to Lenovo.
Motorola was a gigantic powerhouse, and through mismanagement, is a shadow of what it was. Such a shame.
It's funny how back in 2005, IBM sells their PC/server division to Lenovo. Lenovo is currently the largest PC maker. During this time Dell has been bought and sold and re-bought.
Lenovo's margins are still razor-thin. The thing that bothers me most about IBM keeping POWER and Z is that I can't afford either, because the margins are eye-watering.
That was my first impression too. It was extraordinary that that comment was said positively by the CFO, rather than critically by a shareholder or journalist.
Apple, Google, Amazon are all proving the value of vertically integrated product lines, while IBM chooses short-termism.
They really had no choice about divesting PCs. IBM was on Microsoft's bad side so was being charged more for Windows than competitors, and PCs already had razor thin margins. After they sold off their PC business, Microsoft had no reason to charge extra for Windows and that became a viable company.
IBM killed their own PC business by going with the MCA bus, and not allowing 3rd parties to make expansion boards without a license. And the PS/2 series was quite expensive at the time.
Vertical integration is high risk, high reward in that if each component in the stack is a market leader in their industry, the overall company becomes exponentially more valuable.
On the other hand if any component is non-competitive, the other components in the stack are still obligated to give that unperformant component their business. Which reduces the pressure to perform and causes the overall company to gradually become less competitive.
I think a good example of this would be Intel designing chips and also owning the fabrication plants. It's no secret that Intel has been to fabricate their chips for a while now.
I see this type of comment thrown around a bit, but a quick pass of the senior management suggests otherwise. https://newsroom.ibm.com/executive-bios? Not a whole lot of MBAs and a decent amount of engineers.
Vertical integration is a hot term, but unless you have long term monopoly in the market, it’s more likely to be a losing strategy. If you bet on wrong direction, you’re in much deeper troubles, as you cannot switch to other vendor that went other direction (switching vendors is also hard, but much easier than rebuilding and catching up on your internal R&D).
And you lose power of market and economy of scale. Vendors can focus on developing their tech to be better, for everyone, as they get bigger R&D budgets, and you can just focus on improving things that are your true market advantage, not fighting in commodities market.
Note, that doesn’t mean that IBM is doing right thing. But vertical integration is extremely overhyped.
Yeah. Mainframes are arguably the most vertically integrated products there are and yet they’re a dying breed in a rent-maximizing at best industry than a growing one.
As a former IBMer, I completely agree with that sentiment. Little of what IBM is good at is sexy but that doesn't change the fact that they lead on many vertically integrated things. Turning back on those things will hurt them in the long run.
IBM still has plenty of sexy hardware stuff - mainframe and POWER (AIX not so much) are pretty impressive.
That z/OS has tens of millions of lines of code surprised me the other day. It's not like it needs to support 23 brands of mouse and dozens of GPU architectures.
They're divesting lower performing (but not money losing) ventures in order to not hide the performance of their higher performing pieces. This is so they can show the unsustainable growth that stock holders (still) demand from corporations.
They'll look great on paper for a while as you say, at least until their cloud business fails for some reason. When you average growth over a whole company, you do mask high performing parts with low performing ones... the same is true of cash flow and revenue.
If you get rid of parts of your company that are solid performers but aren't doing as well now, then you're getting rid of some of your safety net in the hope you won't need it.
IBM's most impactful business (in terms of wide use) is probably their research labs. Many, many chips today use SOI and copper interconnect technologies. That sort of research doesn't apply much to the cloud, but maybe they're hoping their AI stuff will.
That sentence struck me as well, mostly because people continue to make tons of money in networking, "PCs" and semiconductors. It's not that they didn't "fit the integrated value proposition", it's that IBM has terrible leadership.
No bets needed for what band of clowns will lead the hip, "value proposition" part of the company of course.
Vertically integrated monopolies are inefficient because practically, what you really have in a vertically integrated monopoly is a bunch of separate companies, all following a single, centralized entity and paying tribute to that entity. There is an opportunity for profit here, for shareholders, but very little room to actually improve technology, provide utility to users. Every product in that monopoly becomes less of a computer, more of a mouse-trap to keep people in the ecosystem. If your monopoly has even a single component which can interoperate with other monopolies, then you're basically subsidizing a whole layer of infrastructure.
Plus this practice paints a huge target on your back for anti-trust action, as you are seeing now with the other monopolies. The bigger your monopoly gets, the more potential profit there is for whatever government agent can bust you up. This could result in promotion, christmas bonus, maybe even a corner office with a window. Very high stakes.
The pieces they've divested haven't been valuable as part of IBM. They've fit their new owners businesses better. Thus they've been more valuable with their new owners, which is why IBM sold them.
> A company with vertically integrated...seems like it could have such an edge
Yes but I guess it was the IBM board whom decided that they could better invest in the money with various initiatives. IMHO, they are now (and for ~15 yrs) only choosing a safe route, not an innovative route.
The parts of IBM are worth more than the whole, and many of the company's board members and investors realize that. They are getting the value of these deals, even if "IBM" is not.
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.
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.
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.
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.
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?
That was only announced this week. Something like this would have to be in the works for a long time, so it’s very unlikely that the H1B changes had anything to do with this.
Does IBM own some widely used APIs they could realistically start charging/suing for?
For example, SQL was invented at IBM, but it's been published in ANSI and ISO standards. Surely the formal standardization process precludes an Oracle-style attack on implementors...?
> Surely the formal standardization process precludes an Oracle-style attack on implementors...?
Surely is a strong word. Who knows where this train is going to end up once it derails? They surely offered up permissive patent licensing, and all of those patents have expired by now anyway, but would they have bothered to sign away copyrights that they didn't think they had? Copyright lasts 70 years from the death of the author, so while the patents are all ancient history, the copyright, if such a thing exists, would certainly still be active and there would be decades of infringement to pursue.
Patents that make it into standards are still fair game for licensing. If copyright is understood to apply to APIs themselves (not just the text of the ISO documentation), then why wouldn't a similar sort of licensing practice apply?
Thankfully there is very little of the PC or AT legacy left in current computers. Even backwards compatibility with the BIOS is starting to disappear from PCs.
> IBM splitting itself up into two companies is kind of like when Netflix proposed to split itself up into its future-oriented streaming business and its dying legacy DVD business. Except to make the analogy work for IBM, imagine Netflix had no streaming business...
>The new company will have 90,000 employees and its leadership structure will be decided in a few months, Chief Financial Officer James Kavanaugh told Reuters.
>IBM, which currently has more than 352,000 workers, said it expects to record nearly $5 billion in expenses related to the separation and operational changes.
What does the rest of their business consist of that requires 250,000 employees? Or are layoffs in the mix here?
I think people who haven't worked in/around IBM struggle to comprehend the sheer number of products and services it actively supports and only a portion of that are mainframe products. There are many products that have 100+ engineers on them but might never even make common conversation for how specialized they are. Additionally IBM has a high headcount for supporting those products, with 24/7/365 phone/hands-on support so that can sometimes be almost the similar number of people as the engineers actually developing the product. Since the products are so specialized there are specialized support groups per product. It's definitely easy to have 150+ people per product (especially from the heavy acquisition style they had been doing pre-Red Hat) so the numbers quickly adding up. Many of these groups have enough organization to transition to a standalone company's product team if they could replace the HR, accounting, and other company pieces.
There is certainly also consulting and other groups of people too, but they were not the majority.
Mainframes are shockingly legit. Don't get me wrong, - they're the least sexy possible technology, imo. But they do _work_ in a way that I've rarely seen.
There's a tradeoff between flexibility and stability - the mainframe is just hardcore stable. Sucks to work on a lot of the time, but _damn_ if there isn't a reason financial institutions still do mainframe batch processing.
as a services and solutions provider i imagine they employ a lot of technicians for on site work around the world, and will require much less of them in a cloud environment. just a thought though, anyone who knows better please correct me.
Is there ever an example of this working out well? Either for the “good part” that is kept? Or the “bad part” that doesn’t get to keep the name?
The only one I can think of is Phillip Morris International, Kraft, and Altria that all split out of Phillip Morris. But I think that was because of all the tobacco litigation.
I’ve seen this happen quite a bit and it always seems to be a sign of a declining company. IBM splitting off Lenovo and disk units. HP splitting off enterprise/automatic.
These kind of transformations just seem like accounting tricks for restructuring debt away from some parts into others. It’s curious how this split has $5B planned in expenses. That seems really high.
Maybe Google successfully bought and then shot out Motorola and Boston Dynamics. Their Alphabet reorg didn’t seem to actually change companies.
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Is it just me or does anyone else feel over the decades they've been divesting some of the best (long term) building blocks? A company with vertically integrated silicon, compute, networking, cloud, AI, Enterprise etc. seems like it could have such an edge if only they had focused those engineering capabilities on consolidated, high-margin end products.
I see the other big players going the opposite direction. e.g. Google and Amazon are building their own silicon for an edge in Cloud and AI.
So-called SexyIBM is just another cloud company without a distinguishing barrier to entry. Sure, their growth will look good on paper for a few years, but when Cloud becomes commoditized (which I think is already happening), the capabilities which could have created the kind of real innovation that opens up whole new industries will have all been cleaved away.
It is a financial engineering project. When you see it through that lens all of this makes much more sense.
I hope Apple doesn't eventually succumb. Tim Cook's successor matters.
Companies taken over and run by value extractors (finance/business/marketing) over the value creators (engineers/product/creatives) end up in this stagnated, picked apart state when the grace from the value creation or product wears off.
Value extractors need to learn that you must first create value before you extract it. The reason value extractors originally were attracted to the project/product is usually that it has created value.
R&D has very little value to an MBA so it is cut, but long term it is all the value of the company. Value extractors kill the whales before they even can grow up.
I would argue that this was never true--even from inception. HP was an engineering-first company--not IBM.
IBM was about sales and marketing--they would rent and finance equipment for you even way back.
Now, IBM had world-class engineering, but people forget that a lot of the major companies had great engineering until the 1980s.
Having worked for IBM and being a client of IBM in the past with large gov't agencies , i can also tell you that part of their success is liability perspective from the client. I know many of gov't big wigs who simply hired IBM not because of their talent but because if TSHTF they covered their arses with congressional hearing or lawsuits by saying what more could we do than hiring the vendor that made the product.
IBM is old enough to understand the pitfalls of that approach.
In year zero it sounds great. Integration! Efficiency! And that works for a bit.
Then internal politics causes you to pass on opportunities that competitors take because taking them yourself would cannibalize sales in one of your other lines of business.
Then somebody else comes up with a better microprocessor than you, or better software, or lower cost manufacturing, and it's going to take your internal team five years to catch up. In the meantime all your systems are integrated with your in-house solution, so you can't switch, but the deficient in-house alternative makes you less competitive, so you lose all the customers who can switch easily.
Then you have to cut R&D because of the lost revenue and fall even further behind the competition, which leaves you in a death spiral where the most profitable strategy is to lock-in your existing customers and milk them as hard as possible as you circle the drain.
Or you can concentrate on doing one thing and doing it well, so that you don't risk sinking your entire operation as soon as you fail to execute flawlessly in any one of the six different major fields you've created an internal dependency on.
And in the areas where they do compete, they pour in top dollar to make actually competitive products.
They still make chips in the POWER architecture and the Z architecture for mainframes.
https://en.wikipedia.org/wiki/POWER9
https://en.wikipedia.org/wiki/POWER10
https://en.wikipedia.org/wiki/IBM_z15_(microprocessor)
IBM had the technical chops to create the likes of ARM, nVidia, or any number of big tech companies. They just never seemed to have the leadership capabilities to get out of their comfort zone. I understand the idea of keeping a business focused, but Alphabet and MS don't seem to struggle with managing a diverse portfolio of companies.
Motorola followed that path. They sold off their computer business in the early 1990's. Analog electronics (On Semi), and then the semiconductor business (Freescale, now NXP). Finally, they split the government biz (Motorola Solutions) from the phones, and that was first sold to Google, and what remained then went to Lenovo.
Motorola was a gigantic powerhouse, and through mismanagement, is a shadow of what it was. Such a shame.
IBM still designs chips - what they divested was their semiconductor manufacturing (fab) business.
Apple, Google, Amazon are all proving the value of vertically integrated product lines, while IBM chooses short-termism.
I thought the DoJ investigation stopped Microsoft from doing such things. What am I missing?
On the other hand if any component is non-competitive, the other components in the stack are still obligated to give that unperformant component their business. Which reduces the pressure to perform and causes the overall company to gradually become less competitive.
I think a good example of this would be Intel designing chips and also owning the fabrication plants. It's no secret that Intel has been to fabricate their chips for a while now.
And you lose power of market and economy of scale. Vendors can focus on developing their tech to be better, for everyone, as they get bigger R&D budgets, and you can just focus on improving things that are your true market advantage, not fighting in commodities market.
Note, that doesn’t mean that IBM is doing right thing. But vertical integration is extremely overhyped.
That z/OS has tens of millions of lines of code surprised me the other day. It's not like it needs to support 23 brands of mouse and dozens of GPU architectures.
They're divesting lower performing (but not money losing) ventures in order to not hide the performance of their higher performing pieces. This is so they can show the unsustainable growth that stock holders (still) demand from corporations.
They'll look great on paper for a while as you say, at least until their cloud business fails for some reason. When you average growth over a whole company, you do mask high performing parts with low performing ones... the same is true of cash flow and revenue.
If you get rid of parts of your company that are solid performers but aren't doing as well now, then you're getting rid of some of your safety net in the hope you won't need it.
IBM's most impactful business (in terms of wide use) is probably their research labs. Many, many chips today use SOI and copper interconnect technologies. That sort of research doesn't apply much to the cloud, but maybe they're hoping their AI stuff will.
No bets needed for what band of clowns will lead the hip, "value proposition" part of the company of course.
Plus this practice paints a huge target on your back for anti-trust action, as you are seeing now with the other monopolies. The bigger your monopoly gets, the more potential profit there is for whatever government agent can bust you up. This could result in promotion, christmas bonus, maybe even a corner office with a window. Very high stakes.
Staying at home, the best thing I found to play with is built "digital lego" MOCs using LeoCAD app + LDraw Parts Library.[0]
Seems like IBM CEOs, stayed at home for a long term, just found own "lego-like" game to joy ;)
[0] https://github.com/Symbian9/AWESOME-LDraw
Yes but I guess it was the IBM board whom decided that they could better invest in the money with various initiatives. IMHO, they are now (and for ~15 yrs) only choosing a safe route, not an innovative route.
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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.
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 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.
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.
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.
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.
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 ;)
> 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.
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.
IBM has done this before. They sold personal computer business to Leonovo in 2005.
If you're in the under-performing division, you already know. You've already accepted that you work there. You feel it in your bones.
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.
Often, the “good” part is actually the high-risk, high-growth potential part and the “bad” part is the low-risk, solid returns part.
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.
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.
https://www.macrotrends.net/stocks/charts/CC/chemours/market...
Yes, this is a thing https://en.wikipedia.org/wiki/Bad_bank
No reason any company can’t do it, not just banks
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For example, SQL was invented at IBM, but it's been published in ANSI and ISO standards. Surely the formal standardization process precludes an Oracle-style attack on implementors...?
Surely is a strong word. Who knows where this train is going to end up once it derails? They surely offered up permissive patent licensing, and all of those patents have expired by now anyway, but would they have bothered to sign away copyrights that they didn't think they had? Copyright lasts 70 years from the death of the author, so while the patents are all ancient history, the copyright, if such a thing exists, would certainly still be active and there would be decades of infringement to pursue.
https://www.platformonomics.com/tag/ibm/
As for his take on this latest piece of news: https://twitter.com/charlesfitz/status/1314310748835704833?s...
> IBM splitting itself up into two companies is kind of like when Netflix proposed to split itself up into its future-oriented streaming business and its dying legacy DVD business. Except to make the analogy work for IBM, imagine Netflix had no streaming business...
Not entirely sure I believed him :-)
>IBM, which currently has more than 352,000 workers, said it expects to record nearly $5 billion in expenses related to the separation and operational changes.
What does the rest of their business consist of that requires 250,000 employees? Or are layoffs in the mix here?
There is certainly also consulting and other groups of people too, but they were not the majority.
A lot of this 'cloud technology' we're using, including some that is still being developed, is functionality being ported from mainframe tooling.
I saw a teardown of an IBM cpu module from the early 90's the other day. There were tricks I still haven't seen show up in rackmount hardware.
There's a tradeoff between flexibility and stability - the mainframe is just hardcore stable. Sucks to work on a lot of the time, but _damn_ if there isn't a reason financial institutions still do mainframe batch processing.
The only one I can think of is Phillip Morris International, Kraft, and Altria that all split out of Phillip Morris. But I think that was because of all the tobacco litigation.
I’ve seen this happen quite a bit and it always seems to be a sign of a declining company. IBM splitting off Lenovo and disk units. HP splitting off enterprise/automatic.
These kind of transformations just seem like accounting tricks for restructuring debt away from some parts into others. It’s curious how this split has $5B planned in expenses. That seems really high.
Maybe Google successfully bought and then shot out Motorola and Boston Dynamics. Their Alphabet reorg didn’t seem to actually change companies.
20 years later, Disney paid $7.4 billion for Pixar.