Is NewCo Doomed from the start?

When one looks at this spinoff of NewCo in a little depth, one has to wonder how the heck NewCo will survive and thrive. Most spinoffs, think Delphi Auto Parts from GM, had an independent business that could continue to supply the mother company as well as expand their business in other directions. Here we have IBM with their IBM Cloud offering spinning off GTS (NewCo). GTS, soon to be NewCo, has all the prime IBM Cloud target customers since it has all the SO and Managed Application accounts. It would seem logical that IBM would need to attack the NewCo base of SO and Managed application accounts to get new IBM Cloud customers. Will NewCo be an IBM Cloud reseller? Probably. Will they be a reseller of AWS, Azure and Google? Most likely. Is there going to be a war over which cloud is sold - IBM or the other three Cloud Monsters? Likely. If NewCo doesn't win this war, they will eventually go out of business as the cloud will eventually take a majority of their business.

How can anyone predict anything other than a decline in the NewCo business due to Cloud transition defections? Does NewCo really want to be a cloud reseller? Probably not. Not much margin in this business. Will customers buy Cloud from NewCo? This is certainly to be determined.

So we come back to the question of whether or not Newco is doomed. It could be possible that an independent and fired-up NewCo could transform itself into a fiercesome competitor to IBM, playing on the cloud playing field. Since IBM and Newco are intertwined and, most probably IBM will hamstring NewCo in some way, it seems like Newco could be doomed to a steady decline and eventual failure from the start.

Newco must be given a clear runway to go as fast and as powerfully in the right direction of survival and prosperity. Will this happen? This is anyone's guess. If it doesn't happen, NewCo will probably be a good candidate for shorting the stock.

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The announcement sounds like a for sale sign. IBM has been itching to sell off this business for a long time. Probability is high that once NewCo is scoped out a buyer will emerge.

Innovation is something that is slow to come to infrastructure, because availability and stability is what's desirable in infrastructure.

So to the extent GTS is trying to meet SLA's for uptime, etc. There's a disincentive for change. No one wants outage tickets. (This is one good reason Agile isn't a good fit for infrastructure as well.)

You can do innovation in infrastructure, but it takes two teams... one to keep the wheels on... the other to do build the new way.

That, however contradicts the cost takeout of trying to run with minimal staff / HR costs.

No reason why GTS couldn't be migrating clients to cloud or anything else that comes along... if the money were put into enough staff and enough training to both meet SLA's and engineer the new solutions, as well as start working on commonality of installations, etc.

Unfortunately that costs more not less, and that's contradictory to the sales pitch for outsourcing that goes along the lines of, "Let us take over your data center and run it cheaper".

Innovation and migrating to commonality actually cost more in the beginning, and no one wants to hear that or pay for it.

So unfortunately there's a disconnect between the sales message and the reality.

So as long as the main focus is on meeting the SLA's there's a disincentive for change of any sort that doesn't reduce outages, improve reliability, etc. That doesn't play well with innovation, etc.

Newco will be acquired by whoever values letting IBM do their marketing HCL is the front runner, but others due to the 60 billion in backlog makes a bid worth it. Body shops have figured out how to remove costs to make themselves profitable. YES there is profit in getting big, and the body shops know it. NOTE IBM has always said GTS would get profitable via innovation / automation. How has that worked out? I would say the last 22 quarters of shrinking revenue, unprofitability, and layoffs give you your answer. IBM is punting as they can’t make GTS work due mostly to a lack of innovation, BUT they have the “for sale” sign hanging out, as they are looking for a partner. IBM has done the heavy lifting for whoever buys Newco (trained work force, thinned benefits, new data centers, and most of all a massive backlog). In addition, IBM is offering a partnership with them doing the marketing. That’s pretty sweet if you are a body shop where ever penny counts. IBM requires that you have automation tools to make their backlog efficient, and a management structure who isn’t afraid to chop the dead wood out of the acquired GTS assets. My guess is IBM will ask the acquiring company to shoulder a larger part of IBM’s debt profile, but will sign an agreement to guarantee a partnership for 10 years so the debt can be worked off. REMEMBER body shops main growth driver is cost take out, and not marketing. If IBM offers terms that allow them to shoulder your marketing and you can focus on innovation/cost take out, it’s a win/win.

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Is NewCo Doomed from the start?

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