https://www.bloomberg.com/news/newsletters/2023-05-02/ibm-s-ceo-says-bankers-are-pitching-him-deal-possibilities#xj4y7vzkg
By: Liana Baker and Brody Ford
May 2, 2023, 5:30 PM UTC
Big Blue deals
We got the chance to fire off some questions on dealmaking to IBM’s CEO Arvind Krishna, who stopped by our offices on Monday for a roundtable. Deals are a topic that Big Blue knows well. There's the $34 billion Redhat acquisition in 2019, its separation of Kyndryl in 2021, its divestiture of Watson Health to private equity last year and the latest—a potential disposal of its weather unit.
We predict that legacy tech, or the “incumbents” to put it more politely, is where we're going to see the biggest acquisitions over the next few years as these companies look to transform through M&A. Here are some highlights from what Krishna had to say about dealmaking (when he wasn’t talking about which jobs could be replaced by AI). —Liana Baker and Brody Ford
What are the areas IBM is focused on for deals?
A lot of them are going to be smaller than a Red Hat. I mean substantially smaller. But it's all about getting innovation where our clients want us to be focused.
The areas we’re focused on are hybrid cloud and artificial intelligence. I think on hybrid cloud, I'll use the word tuck-ins. As opposed to something large, because with Red Hat I feel pretty good that we have the basics of what we need to do there.
The other areas would be hybrid cloud data and artificial intelligence automation, which is where Turbonomic fits in, and cybersecurity. Those are sort of the areas where we are most focused on getting more and more heft for our clients.
IBM has a $112 billion market cap, so what size do you consider a tuck-in to be?
We did a tuck-in in automation last year. It was on the order of a few billion. I don't think the number was public, but let's call it like a Turbonomic. So certainly a couple of billion could be a tuck-in. Sometimes a couple of billion could be a new vector, in which case it's not a tuck-in per se.
IBM has been doing some divestitures in recent years. What’s the plan with those going forward? Is the weather unit being sold next?
We don't comment on rumors. We'll always look at our portfolio and say, ‘do things fit exactly according to our focus or do they not?’ If they don't, then we will look at whether we should divest them.
I look at Kyndryl, I don’t call it call it a divestiture. That was much more strategic and that was actually a spinout. In the end, it cost us money to spin it out because we have to give them a healthy balance sheet. You got to put cash on the balance sheet, you got to spend money to spin it out. And even if I add up the few hundred million that we might have made by selling 19% of the shares, that's tiny compared to the overall aggregate.
Health I agree was a divestiture because it didn't align. We said, ‘let's try to find the best home for it and get the right price for it.’ Could there be one or two other? I'll call them very small things. I don't visualize anything significant.
Could a big acquisition dilute the company’s new slimmed down focus?
Not really, but it depends on materiality of course. If we were to do something in areas that are distinct from the ones I talked about, you got to worry about dilution of focus. If you stay in those areas I talked about then I'm not worried about dilution of focus.
Can you elaborate?
I think you should know what you're good at and what you're not good at. We are good at helping people be more productive. We are good at helping people change their business. We aren’t necessarily the ones who are ever going to be great at a consumer devices. Red Hat in the end to me was not dilutive at all. I can imagine possibilities because bankers certainly come with ideas and I look at those, and I say the complexity of the deal may be worth more than it's worth, so we do look at that aspect.