Big Blue Got a Little Smaller: IBM’s Kyndryl Spin-Off Now Complete and Shares Fairly Valued

On Nov. 4, IBM completed its spin-off of its managed infrastructure business, Kyndryl, and, in turn, forfeited its spot as the number one IT services firm in terms of revenue to Accenture, according to CRN. Our post-spin-off fair value estimate for IBM is now $119 per share, as opposed to the $125 fair value estimate we had for the combined pre-spin-off entity. As a reminder, ahead of the spin-off, IBM steadily approached our fair value range upon news of disappointing third-quarter results. With the spin-off, we believe IBM continues to trade in 3-star territory--and maintains its narrow moat, negative moat trend rating. This is a result of our continued belief that the migration to the cloud is affecting all aspects of IBM’s business (not only managed infrastructure) as enterprises rethink their IT needs across the board as they migrate and endure an already disruptive experience. We reiterate that the spin-off’s main benefit is in optics, as though Kyndryl represented the majority of the former IBM’s largest segment, it was a dying business, in our view, dragging down IBM’s top line. Managed infrastructure services for IBM and other IT services vendors have been extremely hard-hit by the migration of workloads to the cloud from on-premises instances, as with the move, enterprises have cloud service providers to manage their infrastructure instead of legacy providers, like IBM. In addition, we think shedding the group will improve IBM’s margin profile.