American multinational technology company International Business Machines Corporation (IBM) announced that its Board of Directors has approved the long-pending separation of Kyndryl, IBM’s managed infrastructure service business. After the separation, IBM will focus on its core hybrid cloud and artificial intelligence (AI) solutions business. Following the news, shares sank 1.4%, closing at $140.47 on October 12.
As per the terms, IBM shareholders will receive 80.1% of Kyndryl’s common stock on a pro-rata basis. Each IBM shareholder will receive one share of Kyndryl for every five IBM shares held. The distribution is expected on November 3, 2021, to shareholders of record on October 25, 2021. After the share distribution, Kyndryl Holdings, Inc. will become an independent publicly traded company with the ticker symbol KD.
The remaining 19.1% of Kyndryl’s common stock will be retained by IBM to exchange for IBM debt during the 12 months following the distribution, subject to market conditions. (See Insiders’ Hot Stocks on TipRanks)
Commenting on the separation, Arvind Krishna, IBM Chairman, and CEO said, “The separation of Kyndryl is a significant step in the continued evolution of IBM, a company now squarely focused on delivering powerful hybrid cloud and AI solutions and capabilities to enterprises around the world.”
Recently, Bank of America Securities analyst Wamsi Mohan maintained a Buy rating on the stock with a price target of $176, implying 25.3% upside potential to current levels.
Mohan cited several encouraging takeaways after IBM’s management provided an update on the business post the spin-off of Kyndryl. IBM expects mid-single-digit revenue growth, FCF generation of $35bn cumulative over a three-year period from 2022 to 2024, a higher mix of software and recurring revenues driving growth, high single-digit growth for IBM consulting, and mid-single-digit software growth.
Mohan said, “We view IBM as a defensive investment given its high exposure to recurring sales, cost-cutting levers, solid balance sheet, potential share gains, and relatively stable margins. We believe IBM will embark on further cost-cutting, and enhance its services and software offerings through acquisitions. Longer-term, we expect IBM to take share in IT spending with its Cloud and AI initiatives.”
Overall, the stock has a Moderate Buy consensus rating based on 4 Buys and 6 Holds. The average International Business Machines price target of $158.20 implies 12.6% upside potential to current levels. Shares have gained 12.3% over the past year.