WEBVTT 1 00:00:07.400 --> 00:00:10.100 Hello and welcome to this film which is devoted to 2 00:00:10.100 --> 00:00:14.800 an extremely important subject spin-off spin-off 3 00:00:13.800 --> 00:00:16.900 is very relevant today 4 00:00:16.900 --> 00:00:19.500 in Karen business situation. It's 5 00:00:19.500 --> 00:00:21.500 considered by a number of companies. 6 00:00:22.400 --> 00:00:26.300 Now I'm going to use the case of Kindle spun 7 00:00:25.300 --> 00:00:29.200 off from IBM quite recently 8 00:00:28.200 --> 00:00:32.200 in October 2020 IBM announced 9 00:00:31.200 --> 00:00:34.800 at the company's going to list. It's it 10 00:00:34.800 --> 00:00:37.600 infrastructure Services Unit, which 11 00:00:37.600 --> 00:00:40.400 is going to be named Kindred. It's represents 12 00:00:40.400 --> 00:00:43.600 something like 20 billion dollars of revenues out 13 00:00:43.600 --> 00:00:46.700 of the total of 80 billion for IBM as 14 00:00:46.700 --> 00:00:49.700 a whole. Well, it's 25% of the revenues 15 00:00:49.700 --> 00:00:52.600 but it is also half of the capital 16 00:00:52.600 --> 00:00:55.500 expenditures. So you understand that this activity 17 00:00:55.500 --> 00:00:58.300 is slightly more Capital intensive at 18 00:00:58.300 --> 00:01:01.100 the rest of IBM and it is 19 00:01:01.100 --> 00:01:03.700 less profitable in a commercial point of view. 20 00:01:04.500 --> 00:01:07.300 If you look at the return on sales e b d 21 00:01:07.300 --> 00:01:11.500 a overseas over revenues. It's about 11 12% for 22 00:01:11.500 --> 00:01:13.000 the it infrastructure business. 23 00:01:13.900 --> 00:01:16.700 Prospectus provided by a Kindle and 24 00:01:16.700 --> 00:01:19.400 10K report now today kendril is 25 00:01:19.400 --> 00:01:22.800 out of IBM and what's remains hybrid cloud 26 00:01:22.800 --> 00:01:26.000 computing Consulting software. The big 27 00:01:25.100 --> 00:01:28.100 deal of sales is 26% 28 00:01:29.200 --> 00:01:32.000 So you understand that the assets turnover is higher for 29 00:01:32.600 --> 00:01:35.200 IBM, excluding Kindle and the return on service 30 00:01:35.200 --> 00:01:38.300 is higher. So definitely they want to get rid of 31 00:01:38.300 --> 00:01:41.700 this non-strategic asset. It's announced 32 00:01:41.700 --> 00:01:44.500 in October 2020. It's going to be completed in October 33 00:01:44.500 --> 00:01:47.200 2021 now kendril is 34 00:01:47.200 --> 00:01:50.500 listed ticker KD on New 35 00:01:50.500 --> 00:01:53.400 York Stock Exchange before we get back to the case. I 36 00:01:53.400 --> 00:01:56.300 would like that we spend some time discussing the motivations of 37 00:01:56.300 --> 00:01:59.500 companies when they decide to spin off and the 38 00:01:59.500 --> 00:02:02.500 various methods which are used by this 39 00:02:02.500 --> 00:02:02.700 companies. 40 00:02:03.500 --> 00:02:06.600 What about motivations first? It's about 41 00:02:06.600 --> 00:02:10.400 getting rid of non-core non-strategy 42 00:02:09.400 --> 00:02:12.600 asset it comes from where it 43 00:02:12.600 --> 00:02:15.600 comes from the fact that in the 70s and 80s, 44 00:02:15.600 --> 00:02:18.800 they were conglomerates with core and non-core 45 00:02:18.800 --> 00:02:21.800 assets Diversified conglomerates terrible 46 00:02:21.800 --> 00:02:24.800 reputations. And by the way, this is why the 47 00:02:24.800 --> 00:02:27.600 market for corporate control emerge in 48 00:02:27.600 --> 00:02:30.300 1980s as a consequence of 49 00:02:30.300 --> 00:02:33.900 freeing the market from any constraint. That's 50 00:02:33.900 --> 00:02:36.900 another story. Now, what does it mean non-core 51 00:02:36.900 --> 00:02:39.300 for a telecommunication operator you remember 52 00:02:39.300 --> 00:02:42.800 we discuss that in a video quite recently the 53 00:02:42.800 --> 00:02:45.600 towers why because Towers about 54 00:02:45.600 --> 00:02:48.400 relay State a piece of land a 55 00:02:48.400 --> 00:02:51.200 mask and so on not very strategic on a technology 56 00:02:51.200 --> 00:02:54.600 called point of view What is strategy is the location? This is 57 00:02:54.600 --> 00:02:57.200 why as a company I get rid of 58 00:02:57.200 --> 00:03:00.500 the towers, but I negotiate a long term contract or 59 00:03:00.500 --> 00:03:03.200 agreement with American Tower or sell next 60 00:03:03.700 --> 00:03:06.300 32 years four times eight years 61 00:03:06.300 --> 00:03:10.100 long-term location is again strategic. 62 00:03:12.100 --> 00:03:15.700 Beforehand. I was keeping at home my 63 00:03:15.700 --> 00:03:18.600 mass my Towers. But today I observed 64 00:03:18.600 --> 00:03:21.400 as they are seemingly over evaluated. What 65 00:03:21.400 --> 00:03:24.500 do I do? This? Non-strategy asset is 66 00:03:24.500 --> 00:03:27.400 really nonstrategy because I can sell 67 00:03:27.400 --> 00:03:30.400 it now at the price which is more than it's 68 00:03:30.400 --> 00:03:33.600 quotes fundamental value out of 69 00:03:33.600 --> 00:03:34.100 the picture. 70 00:03:34.900 --> 00:03:37.300 Sometimes it's very easy, you know 71 00:03:37.300 --> 00:03:40.300 the food company Denon Denon is 72 00:03:40.300 --> 00:03:43.600 in dairy product mineral water baby care baby food. 73 00:03:43.600 --> 00:03:46.500 And then on Once Upon a Time was in a champagne business 74 00:03:46.500 --> 00:03:49.600 for any reason champagne is luxury good 75 00:03:49.600 --> 00:03:52.700 baby food, baby care and mineral watery consumable 76 00:03:52.700 --> 00:03:55.700 Goods. There's no reason why you should keep the champagne 77 00:03:55.700 --> 00:03:58.700 business and it was sold in order to find on 78 00:03:58.700 --> 00:04:01.300 some Acquisitions in a consumer good business 79 00:04:01.300 --> 00:04:04.900 and of the motivation, which is quite interesting to analyze 80 00:04:04.900 --> 00:04:07.700 on a strategic point of view. Sometimes the 81 00:04:07.700 --> 00:04:10.300 mother company can be a constraint for the 82 00:04:10.300 --> 00:04:13.700 business development of the activity. It's exactly 83 00:04:13.700 --> 00:04:17.300 the case of the car industry decades ago. 84 00:04:17.300 --> 00:04:20.900 Gm4. They were very much integrated and 85 00:04:20.900 --> 00:04:24.300 they were producing Parts components modules. 86 00:04:23.300 --> 00:04:26.300 So you understand that if 87 00:04:26.300 --> 00:04:30.100 you are producing the mold, you are the part for GM. It's 88 00:04:29.100 --> 00:04:32.100 a bit difficult to sell the same 89 00:04:32.100 --> 00:04:34.300 stuff to four or to be NW. 90 00:04:35.300 --> 00:04:39.100 Now this town was spun off from Ford. Delphi 91 00:04:38.100 --> 00:04:41.700 was spun off from General Motors for 92 00:04:41.700 --> 00:04:44.700 Asia was a controlling into S4 pairs 93 00:04:44.700 --> 00:04:47.200 app agency train now stellantis after the 94 00:04:47.200 --> 00:04:50.800 merger with FCA now for Asia is 95 00:04:50.800 --> 00:04:53.100 absolutely independent from PSA and 96 00:04:53.100 --> 00:04:56.600 from stantis. Now the spinoff is very important for 97 00:04:56.600 --> 00:05:00.100 the product development of the company. When 98 00:04:59.100 --> 00:05:02.500 you are a parts supplier a 99 00:05:02.500 --> 00:05:05.200 new contribute to the development of a car. What do 100 00:05:05.200 --> 00:05:08.800 you know plenty of information confidential about what 101 00:05:08.800 --> 00:05:11.900 the product in the end will look like in two 102 00:05:11.900 --> 00:05:13.100 three four years time. 103 00:05:13.800 --> 00:05:16.300 And of course this information should not be 104 00:05:16.300 --> 00:05:19.900 shared. Now imagine that you are the auto part division 105 00:05:19.900 --> 00:05:22.400 of Ford imagine that 106 00:05:22.400 --> 00:05:25.700 GM wants to ask you to develop a part 107 00:05:25.700 --> 00:05:28.600 for a new product which is going to be launched into 108 00:05:28.600 --> 00:05:31.000 three years time. Then you have access to 109 00:05:31.700 --> 00:05:33.600 confidential information for GM. 110 00:05:34.300 --> 00:05:37.200 And you are a subsidiary and you are a division 111 00:05:37.200 --> 00:05:41.400 working for four. There's a little bit potential conflict 112 00:05:40.400 --> 00:05:43.300 of interest. So you want to get 113 00:05:43.300 --> 00:05:46.500 out of that now Vista Airlines completely quote in 114 00:05:46.500 --> 00:05:49.600 their pattern from four and then it can serve 115 00:05:49.600 --> 00:05:52.800 food and GM and any car manufacturer 116 00:05:52.800 --> 00:05:53.700 on the planet. 117 00:05:54.500 --> 00:05:58.100 So you understand that being out of allows 118 00:05:57.100 --> 00:06:00.500 you to get for further development. 119 00:06:01.900 --> 00:06:04.500 Sometimes the objective is to show the real 120 00:06:04.500 --> 00:06:08.000 value of an asset which is absolutely not visible in 121 00:06:07.500 --> 00:06:10.300 the balance sheet and in the business operations of 122 00:06:10.300 --> 00:06:13.600 the company, so you want to show the real value you 123 00:06:13.600 --> 00:06:16.100 make this pin off. Sometimes you want to 124 00:06:16.100 --> 00:06:19.300 give agility keep that in mind because I'm 125 00:06:19.300 --> 00:06:21.400 going to discuss that in a couple of minutes. 126 00:06:22.500 --> 00:06:25.700 But sometimes a motivations are not that 127 00:06:25.700 --> 00:06:28.700 prestigious I would say you remember 128 00:06:28.700 --> 00:06:31.500 the case of Coca-Cola on the bottling activity 129 00:06:31.500 --> 00:06:34.500 Why Did Coca Cola God 130 00:06:34.500 --> 00:06:37.800 read of the bottling activity to improve the financial ratios 131 00:06:37.800 --> 00:06:40.600 first of them economic profit to 132 00:06:40.600 --> 00:06:43.600 avoid being taken over and increase the 133 00:06:43.600 --> 00:06:46.300 stock price. So you want to improve the 134 00:06:46.300 --> 00:06:50.000 ratios. It's not about industry. It's about ratio. 135 00:06:50.700 --> 00:06:53.400 Also, sometimes the companies want 136 00:06:53.400 --> 00:06:56.400 to transfer a little bit of debt when there is 137 00:06:56.400 --> 00:06:59.600 too much debt in a company use pin-off and you 138 00:06:59.600 --> 00:07:02.000 load this spernoff company with a little bit of 139 00:07:02.100 --> 00:07:05.600 debt which reduces your own inadaptedness. Of course, 140 00:07:05.600 --> 00:07:08.400 it is not regarded as a main objective, but 141 00:07:08.400 --> 00:07:11.600 it's quite important in the process as well. Now, let's 142 00:07:11.600 --> 00:07:13.700 go back a minute on agility. 143 00:07:14.400 --> 00:07:17.400 Imagine that you are in charge of an activity 144 00:07:17.400 --> 00:07:20.700 of a business unit inside a big group. Your 145 00:07:20.700 --> 00:07:23.400 business is quite specific. It's quite different from 146 00:07:23.400 --> 00:07:26.700 the rest of the company and you have the feeling that you 147 00:07:26.700 --> 00:07:29.400 are not very much understood by the 148 00:07:29.400 --> 00:07:32.400 sea level the top guys and these 149 00:07:32.400 --> 00:07:35.300 guys you have to discuss plenty of other issues. You 150 00:07:35.300 --> 00:07:39.500 are quite small and they don't have enough time to devote to 151 00:07:39.500 --> 00:07:42.600 your activity. So you are a little bit left alone. 152 00:07:42.600 --> 00:07:45.900 You understand the rationality of spinning 153 00:07:45.900 --> 00:07:48.500 off. If you are out of the pictures and 154 00:07:48.500 --> 00:07:51.800 your sea level is going to take care of your business 155 00:07:51.800 --> 00:07:54.300 activity and that's much more 156 00:07:54.300 --> 00:07:57.300 important. You will have the possibility to attract new 157 00:07:57.300 --> 00:08:00.800 customers generate economies of you gain in agility 158 00:08:00.800 --> 00:08:03.200 in strategy and operating agility. 159 00:08:04.100 --> 00:08:08.000 And it is very true for activities with very different 160 00:08:07.600 --> 00:08:10.400 business economics. And as a 161 00:08:10.400 --> 00:08:13.700 consequence very different Financial metrics imagine for 162 00:08:13.700 --> 00:08:16.400 example, your Capital intensive business 163 00:08:16.400 --> 00:08:19.600 in a large group, which is very light in terms 164 00:08:19.600 --> 00:08:20.900 of capex consumption. 165 00:08:21.700 --> 00:08:24.500 If you are capital intensive what's very important is a 166 00:08:24.500 --> 00:08:28.000 return on Capital. It's to attract long term 167 00:08:27.600 --> 00:08:30.600 customers long-term contracts Rick your 168 00:08:30.600 --> 00:08:33.200 own and more revenues, but for the group, you know, the 169 00:08:33.200 --> 00:08:37.100 Rosa is much less important because Capital employees negligible 170 00:08:36.100 --> 00:08:40.300 and what is important is a churn right? 171 00:08:40.300 --> 00:08:43.300 So you understand that you don't speak the same language. You don't 172 00:08:43.300 --> 00:08:46.700 have the same Financial metrics then it's good idea to spin 173 00:08:46.700 --> 00:08:46.700 off. 174 00:08:47.800 --> 00:08:50.600 Different methods you can simply sell the 175 00:08:50.600 --> 00:08:53.600 business to private Equity to another company 176 00:08:53.600 --> 00:08:56.100 in industrial activity itself. 177 00:08:56.800 --> 00:08:59.800 When the acquiring company is overloaded with 178 00:08:59.800 --> 00:09:03.100 that it becomes a leverage buyout sometimes 179 00:09:02.100 --> 00:09:06.400 management leverage management buyout 180 00:09:05.400 --> 00:09:08.700 and as a alternative is a 181 00:09:08.700 --> 00:09:11.500 split up imagine that in a group. There are 182 00:09:11.500 --> 00:09:14.100 three different activities a b and c 183 00:09:14.100 --> 00:09:17.200 there is no Synergy between these activities or 184 00:09:17.200 --> 00:09:20.000 quite minimum synergies. What do you 185 00:09:20.100 --> 00:09:23.800 do you split up and you create three different entities. 186 00:09:23.800 --> 00:09:26.800 There are not owned by any holding 187 00:09:26.800 --> 00:09:29.700 any more and they have their own separate life. 188 00:09:29.700 --> 00:09:32.600 You remember the IPO Volvo from 189 00:09:32.600 --> 00:09:35.700 GLE. It's about listing the business unit 190 00:09:35.700 --> 00:09:39.000 as neighbor carve out as fast 191 00:09:38.500 --> 00:09:41.200 technology is concerned imagine that in your 192 00:09:41.200 --> 00:09:44.600 are in the labs. You have develop the specific technology, which 193 00:09:44.600 --> 00:09:47.300 you can protect with the pattern intellectual property 194 00:09:47.300 --> 00:09:50.300 and so on and so forth, but this technology is 195 00:09:50.300 --> 00:09:53.500 not part of your technology called strategy is not part 196 00:09:53.500 --> 00:09:56.500 of your business strategy. What do you do you put 197 00:09:56.800 --> 00:09:59.200 The team and the patterns in a separate 198 00:09:59.200 --> 00:10:03.500 entity and these guys start running the business buys himself. 199 00:10:03.500 --> 00:10:06.700 It happens very often when companies have 200 00:10:06.700 --> 00:10:09.100 a strategy of corporate venturing. 201 00:10:09.700 --> 00:10:13.200 It's been out and the last ones about spin-off 202 00:10:12.200 --> 00:10:15.600 which simply means that you are going to distribute the 203 00:10:15.600 --> 00:10:18.700 shares for example to the existing shareholders, which 204 00:10:18.700 --> 00:10:20.400 is a case of IBM. 205 00:10:21.300 --> 00:10:25.500 The IBM shareholders received one kindral 206 00:10:24.500 --> 00:10:27.600 share for each and every 207 00:10:27.600 --> 00:10:30.300 five IBM shares. So you have 208 00:10:30.300 --> 00:10:33.700 five IDM shares and as a dividend tax 209 00:10:33.700 --> 00:10:36.900 impact, you're going to receive one kind 210 00:10:36.900 --> 00:10:39.200 real share. Of course the value of 211 00:10:39.200 --> 00:10:42.600 your portfolio is not changed by one penny, but 212 00:10:42.600 --> 00:10:45.200 what is very important is that now? It's split 213 00:10:45.200 --> 00:10:48.600 into IBM standing alone and Kindle spun off 214 00:10:48.600 --> 00:10:52.000 now, it's impossible to speak about IBM without 215 00:10:51.400 --> 00:10:54.700 looking at the past and a fantastic history 216 00:10:54.700 --> 00:10:57.200 of this iconic firm. The company 217 00:10:57.200 --> 00:11:00.500 is going to be formally created in 1911 and will 218 00:11:00.500 --> 00:11:04.300 become International Business Machines in 1924. 219 00:11:05.300 --> 00:11:08.200 In 1914. The CEO is 220 00:11:08.200 --> 00:11:11.400 Thomas Watson senior. He's going to be the 221 00:11:11.400 --> 00:11:14.400 CEO up to 1956 and he's 222 00:11:14.400 --> 00:11:17.900 going to be replaced by Thomas Watson Jr. That's 223 00:11:17.900 --> 00:11:21.100 fantastic. Isn't it in 1915 224 00:11:20.100 --> 00:11:23.800 the Moto of the companies created 225 00:11:23.800 --> 00:11:26.700 sink and you remember that Steve 226 00:11:26.700 --> 00:11:29.300 Jobs slightly changed the stories 227 00:11:29.300 --> 00:11:31.600 with Apple Computers a few decades there. 228 00:11:32.300 --> 00:11:35.100 In 1934 in the middle 229 00:11:35.100 --> 00:11:38.500 of the crisis when there is a big depression in 230 00:11:38.500 --> 00:11:41.200 the United States people are paid by the 231 00:11:41.200 --> 00:11:44.300 peace and then Watson is going to replace that by 232 00:11:44.300 --> 00:11:48.500 a fixed salary, which is a fantastic social 233 00:11:47.500 --> 00:11:50.900 Improvement for the employees at 234 00:11:50.900 --> 00:11:51.600 IBM. 235 00:11:52.300 --> 00:11:56.700 now in 1952 the first real manframe 236 00:11:55.700 --> 00:11:59.300 computer IBM seven or 237 00:11:58.300 --> 00:11:59.400 one 238 00:12:00.400 --> 00:12:03.200 a few years later and 64. They're very 239 00:12:03.200 --> 00:12:06.600 famous IBM system 360 and 240 00:12:06.600 --> 00:12:09.800 also with word processing starts its 241 00:12:09.800 --> 00:12:13.100 history and the group is transferred into armock New 242 00:12:12.100 --> 00:12:15.800 York the head office now is there 243 00:12:16.400 --> 00:12:19.600 In 1966 the digital random 244 00:12:19.600 --> 00:12:22.500 access memory is no more in 245 00:12:22.500 --> 00:12:25.500 the hands of IBM as you know today but it was created 246 00:12:25.500 --> 00:12:29.200 invented in the labs of the company in 1966 247 00:12:28.200 --> 00:12:32.000 and also invention from the lab but 248 00:12:31.600 --> 00:12:35.000 one under brought a French mathematician 249 00:12:34.900 --> 00:12:39.000 invented the fractal geometry, which 250 00:12:37.100 --> 00:12:40.500 is very much different 251 00:12:40.500 --> 00:12:43.700 from the very famous goals log 252 00:12:43.700 --> 00:12:46.300 normal distribution of returns, which is widely used 253 00:12:46.300 --> 00:12:49.400 by academics in economics and finance. This 254 00:12:49.400 --> 00:12:52.400 is why I'm under broad was not very much accepted by 255 00:12:52.400 --> 00:12:55.300 the academic world, even though what it describes 256 00:12:55.300 --> 00:12:56.900 it's much closer to the reality. 257 00:12:57.900 --> 00:13:01.800 It happens in the academic world. It was 1967 258 00:13:00.800 --> 00:13:04.300 a few years later speech recognition 259 00:13:03.300 --> 00:13:06.800 the invention of the floppy disk 260 00:13:06.800 --> 00:13:10.100 1971 the first IBM PC 261 00:13:09.100 --> 00:13:13.200 as a response to Apple and some others shows 262 00:13:12.200 --> 00:13:15.600 in 1981. It is 263 00:13:15.600 --> 00:13:18.500 developed in the skunk work process in order 264 00:13:18.500 --> 00:13:21.900 to avoid pollution from the main frame developers and 265 00:13:21.900 --> 00:13:24.300 so on so forth now IBM looks 266 00:13:24.300 --> 00:13:27.600 very strong. Robust one century old 267 00:13:27.600 --> 00:13:30.800 company. Well, sometimes it was quite fragile 268 00:13:30.800 --> 00:13:33.500 and when Luke gerstner becomes a 269 00:13:33.500 --> 00:13:36.900 CEO in 1993 is a company is on 270 00:13:36.900 --> 00:13:39.400 the verge of bankruptcy. Now the company will bounce 271 00:13:39.400 --> 00:13:42.400 back but 93 is very tough moment 272 00:13:42.400 --> 00:13:45.300 in 95 acquisition of 273 00:13:45.300 --> 00:13:48.900 lotus Development Corporation everybody. Who 274 00:13:48.900 --> 00:13:51.700 knows what the spreadsheet is about. Maybe remember 275 00:13:51.700 --> 00:13:54.800 these nice period men frame 276 00:13:54.800 --> 00:13:57.700 soft the kids and computer super calculated. 277 00:13:57.800 --> 00:14:00.300 Deep blue defeats Casper off 278 00:14:00.300 --> 00:14:04.400 in chess game in 1997 the 279 00:14:03.400 --> 00:14:06.500 PC story which started in 280 00:14:06.500 --> 00:14:09.500 81 is going to stop in 2005 when the 281 00:14:09.500 --> 00:14:13.600 business is sold to the Chinese manufacturer Lenovo again 282 00:14:12.600 --> 00:14:15.700 supercomputer what's on 283 00:14:15.700 --> 00:14:18.500 very well known in 2011. But 284 00:14:18.500 --> 00:14:21.500 even though the company is historically in the Mainframe 285 00:14:21.500 --> 00:14:24.800 and super calculator. It's progressively getting 286 00:14:24.800 --> 00:14:28.500 towards Services cloud computing software. 287 00:14:27.500 --> 00:14:31.400 And in 2019, IBM 288 00:14:30.400 --> 00:14:34.100 bought red hat for 34 billion 289 00:14:33.100 --> 00:14:36.500 dollars quite a big figure and 290 00:14:36.500 --> 00:14:38.200 a good will of the balance it today. 291 00:14:39.200 --> 00:14:42.200 And the consequence of transforming the 292 00:14:42.200 --> 00:14:45.100 company is what we are discussing today, which is 293 00:14:45.100 --> 00:14:49.600 a spinoff of kendrail announced in 2020 realized 294 00:14:48.600 --> 00:14:51.300 in 2021. Now what about 295 00:14:51.300 --> 00:14:56.000 the evolution of sales and revenues at IBM early 1970 296 00:14:54.200 --> 00:14:57.800 billion and then a dramatic 297 00:14:57.800 --> 00:15:00.700 moment low point in 93 the 298 00:15:00.700 --> 00:15:03.200 company bounces back and is going 299 00:15:03.200 --> 00:15:06.700 to reach more than 100 billion dollars at the 300 00:15:06.700 --> 00:15:09.400 beginning of the 2010. But what do 301 00:15:09.400 --> 00:15:13.100 You observe during the last 10 years the revenues 302 00:15:12.100 --> 00:15:15.800 of the company progressively went down 303 00:15:15.800 --> 00:15:18.500 then stabilized, of course 304 00:15:18.500 --> 00:15:21.200 now it's down because of the spinoff of Kindle. But 305 00:15:21.200 --> 00:15:24.600 even if you add Kinder revenues to IBM revenues 306 00:15:24.600 --> 00:15:27.400 today, you understand that it's very difficult 307 00:15:27.400 --> 00:15:30.500 to grow. And in the meantime, the cloud business is 308 00:15:30.500 --> 00:15:33.100 running like hell interestingly. When you 309 00:15:33.100 --> 00:15:36.800 look at the value of the brand IBM, it 310 00:15:36.800 --> 00:15:39.100 was in 2013 when the capital 311 00:15:39.200 --> 00:15:42.700 That it's maximum value 79 billion 312 00:15:42.700 --> 00:15:45.500 dollars according to into brand and then 313 00:15:45.500 --> 00:15:48.700 it goes down with the sales with the revenues. 314 00:15:48.700 --> 00:15:51.800 Of course today. The company is still number 18 in 315 00:15:51.800 --> 00:15:54.300 the list with a brand value, which is 33 billion 316 00:15:54.300 --> 00:15:58.700 dollars, but it's quite far from the maximum of 2013. 317 00:15:59.600 --> 00:16:03.200 Interestingly there are number 18 number 13 318 00:16:02.200 --> 00:16:05.600 Facebook with 30 6 billion 319 00:16:05.600 --> 00:16:08.900 just a little bit more but apple is number one by far 320 00:16:08.900 --> 00:16:11.600 with 48 billion dollars of 321 00:16:11.600 --> 00:16:14.600 brand value nurses was about revenues but 322 00:16:14.600 --> 00:16:17.300 what about operating expenses? You know that there is 323 00:16:17.300 --> 00:16:20.300 an operating expense which is research and development. It's not 324 00:16:20.300 --> 00:16:23.600 an expense. It's not a cause it's an investment quite stable 325 00:16:23.600 --> 00:16:26.200 as a percentage to revenues. Of course, 326 00:16:26.200 --> 00:16:29.800 it goes up during the last three years not because the companies investing 327 00:16:29.800 --> 00:16:32.800 more in R&D, but because the company 328 00:16:32.800 --> 00:16:35.700 spinning off kendril is taking 329 00:16:35.700 --> 00:16:38.600 real out of the p&l and the balance 330 00:16:38.600 --> 00:16:39.500 sheet and the accounts 331 00:16:40.200 --> 00:16:43.700 As a consequence Kindle is a company with plenty of revenues are 332 00:16:43.700 --> 00:16:47.100 not much R&D. So if you have roughly the 333 00:16:46.100 --> 00:16:49.600 same amount of R&D and significantly res Revenue 334 00:16:49.600 --> 00:16:52.100 are indeed to revenue is up. It does not 335 00:16:52.100 --> 00:16:56.600 mean that you invest more it means that you spun off a non-r&d 336 00:16:55.600 --> 00:16:58.600 intensive business unit. But 337 00:16:58.600 --> 00:17:03.600 what is interesting to observe what happens to sgna in 338 00:17:02.600 --> 00:17:05.200 direct costs real costs 339 00:17:05.200 --> 00:17:08.400 well stable and then it's up and it's a 340 00:17:08.400 --> 00:17:11.200 by five percent. This is why at the 341 00:17:11.200 --> 00:17:14.400 end of the day the return on sales is down by five 342 00:17:14.400 --> 00:17:17.700 percent during the last years when you 343 00:17:17.700 --> 00:17:20.200 calculate the return on says which you combine with 344 00:17:20.200 --> 00:17:23.500 the assets to an over the assets productivity of 345 00:17:23.500 --> 00:17:26.400 the other company. What do you get Deport? No more formula the 346 00:17:26.400 --> 00:17:30.000 Roses the return on Capital employed the economic indicator. 347 00:17:30.700 --> 00:17:33.100 And then you understand that when the assets don't 348 00:17:33.100 --> 00:17:36.400 always dramatically down during the last year's as a consequence of 349 00:17:36.400 --> 00:17:39.300 Acquisitions. The main one is 350 00:17:39.300 --> 00:17:42.300 red hat in 2019 and the assets don't 351 00:17:42.300 --> 00:17:45.300 always collapsing because you put a lot of good will at the 352 00:17:45.300 --> 00:17:48.700 denominators level of C assets turnover what happens assets turnover 353 00:17:48.700 --> 00:17:49.000 is down. 354 00:17:49.900 --> 00:17:53.200 We don't sales is down return capital is definitely 355 00:17:52.200 --> 00:17:55.400 down to 10% today. 356 00:17:55.400 --> 00:17:58.100 Now, once we have described the evolution 357 00:17:58.100 --> 00:18:01.800 of the economic indicators of return on Capital employed. It's interesting 358 00:18:01.800 --> 00:18:04.400 to make the correlation with a stock price. You should 359 00:18:04.400 --> 00:18:07.800 look at 1985. The stock price is quite 360 00:18:07.800 --> 00:18:10.500 stable and then he's going to drop with a 361 00:18:10.500 --> 00:18:14.000 low point in 1993 near bankruptcy. 362 00:18:13.300 --> 00:18:16.100 Then there will be a recovery. 363 00:18:16.800 --> 00:18:19.500 And when the NASDAQ is very much down as a consequence 364 00:18:19.500 --> 00:18:22.500 of the explosion of the internet bubble. IBM is 365 00:18:22.500 --> 00:18:25.500 down but less why because a company shows 366 00:18:25.500 --> 00:18:28.100 some resilience low beta I will 367 00:18:28.100 --> 00:18:31.600 tell you in a minute that the beta range of IBM is 368 00:18:31.600 --> 00:18:33.300 significantly less than one. 369 00:18:34.300 --> 00:18:37.300 Stabilization increase and if you look at the last 370 00:18:37.300 --> 00:18:40.200 10 years you understand that stock prices a bit 371 00:18:40.200 --> 00:18:43.900 sad as a consequence of the declining economic 372 00:18:43.900 --> 00:18:46.400 performance of the company, it goes down. 373 00:18:46.400 --> 00:18:49.400 It seems to go a little bit bare the last 374 00:18:49.400 --> 00:18:52.200 month, but it's absolutely not fantastic. 375 00:18:53.900 --> 00:18:56.400 The Bay tide itself is in 376 00:18:56.400 --> 00:18:59.300 a Range, which is 0.4.8. Of course 377 00:18:59.300 --> 00:19:02.700 you remember that when you calculate an econometric beta sometimes 378 00:19:02.700 --> 00:19:05.700 it's very much up. Sometimes it's very much down even 379 00:19:05.700 --> 00:19:09.500 negative in the case of IBM sometimes but 380 00:19:08.500 --> 00:19:11.600 you understand that is a company 381 00:19:11.600 --> 00:19:15.600 is quite resilient 0.4 0.8. It's 382 00:19:15.600 --> 00:19:18.300 a robust company which goes throughout the 383 00:19:18.300 --> 00:19:21.500 turbulances. Now, it's always fundamental to 384 00:19:21.500 --> 00:19:24.900 make the correlation between the economic performance and value creation 385 00:19:24.900 --> 00:19:27.400 the relative value creation, which is a market to 386 00:19:27.400 --> 00:19:30.400 book Enterprise Value is market value of fancy 387 00:19:30.400 --> 00:19:33.200 plus net Financial that which is a value of 388 00:19:33.200 --> 00:19:36.800 the capital employ the value of the business operations and when 389 00:19:36.800 --> 00:19:39.300 you divide the value of business operations by how much 390 00:19:39.300 --> 00:19:42.700 is invested you get the relative value creation, which 391 00:19:42.700 --> 00:19:45.200 is obviously correlated with the economic 392 00:19:45.200 --> 00:19:48.500 performance the Rosie that with many 393 00:19:48.500 --> 00:19:51.000 companies and IBM is the same 394 00:19:51.300 --> 00:19:53.600 as the rest of the planet. There's a strong 395 00:19:53.900 --> 00:19:56.300 Station between the rousse and the market to 396 00:19:56.300 --> 00:19:59.700 book it's fascinating. Now. Let's go back to Kindle which 397 00:19:59.700 --> 00:20:02.400 is spun off from IBM kin drill 398 00:20:02.400 --> 00:20:05.400 is definitely in the roots in the historical roots in 399 00:20:05.400 --> 00:20:06.600 the past of five year. 400 00:20:07.200 --> 00:20:09.400 But there's a company have a future. 401 00:20:10.200 --> 00:20:13.400 If you look at the recent years, the revenues are down. 402 00:20:13.400 --> 00:20:16.700 The sales are down in 2018. Looking 403 00:20:16.700 --> 00:20:19.100 at the financial communication provided by 404 00:20:19.100 --> 00:20:22.900 the company the revenues where almost 22 billion 405 00:20:22.900 --> 00:20:26.600 today. It is a bit more than 18.5 406 00:20:25.600 --> 00:20:29.000 billion dollars. So declining in 407 00:20:28.600 --> 00:20:31.800 the meantime, as a 408 00:20:31.800 --> 00:20:35.300 percentage to revenue is down and capex 409 00:20:34.300 --> 00:20:37.400 as a percentage to revenue is down. Of 410 00:20:37.400 --> 00:20:40.100 course you pay your capex with your big die. If you remember 411 00:20:40.100 --> 00:20:43.400 the concept of the free cash flow. This is why the 412 00:20:43.400 --> 00:20:46.800 company is investing as a profitabetes declining the 413 00:20:46.800 --> 00:20:49.200 commercial activity is declining which is 414 00:20:49.200 --> 00:20:52.600 not very attractive for an investor. Of course, 415 00:20:52.600 --> 00:20:55.500 you have the company the former CFO of 416 00:20:55.500 --> 00:20:58.200 IBM size. Now, we are standing alone. 417 00:20:58.200 --> 00:21:01.200 We have gaining agility and we 418 00:21:01.200 --> 00:21:04.200 are going to be able to bounce back but it has to be 419 00:21:04.200 --> 00:21:07.600 demonstrated. Now what happened to Kindle since 420 00:21:07.600 --> 00:21:09.900 the listing at the end of October? 421 00:21:10.200 --> 00:21:14.400 2021 the opening stock price 20 seconds 422 00:21:14.400 --> 00:21:18.300 of October in the morning is $50 and it's 423 00:21:18.300 --> 00:21:21.500 represents an Enterprise Value, which is five to 424 00:21:21.500 --> 00:21:24.300 six times the ability a few weeks 425 00:21:24.300 --> 00:21:27.800 later the 16th of November the stock 426 00:21:27.800 --> 00:21:30.600 prices under 20 starting from 427 00:21:30.600 --> 00:21:31.200 50. 428 00:21:32.100 --> 00:21:35.900 In 22, it's going to get to a low point which is about 10 429 00:21:35.900 --> 00:21:38.200 dollars and today it stands within the 430 00:21:38.200 --> 00:21:40.100 range which is 11 to 13. 431 00:21:41.400 --> 00:21:44.600 That means a market capitalization which multiplied bus 432 00:21:44.600 --> 00:21:47.600 number of shares outstanding is about 2.6 billion dollars. 433 00:21:48.500 --> 00:21:51.500 When you add 1 billion dollar of net 434 00:21:51.500 --> 00:21:54.600 financial debt, you get to an Enterprise Value, which is 3.6 billion 435 00:21:54.600 --> 00:21:57.700 dollars. It is less than twice yet 436 00:21:57.700 --> 00:22:00.700 just a bit da so you understand that. The credibility 437 00:22:00.700 --> 00:22:02.100 of the company is low. 438 00:22:02.900 --> 00:22:05.700 When you look at the graph of the New York Stock Exchange 439 00:22:05.700 --> 00:22:08.200 as opposed to Kindle New York 440 00:22:08.200 --> 00:22:12.300 Stock Exchange went down gradually down but kind real was significant 441 00:22:11.300 --> 00:22:14.600 drop and then it followed the 442 00:22:14.600 --> 00:22:17.300 Marquette and in addition to that. The last news 443 00:22:17.300 --> 00:22:20.600 are not very optimistic on the 31st 444 00:22:20.600 --> 00:22:23.300 of May 2022 a few 445 00:22:23.300 --> 00:22:26.300 days ago the walls an announcement made by 446 00:22:26.300 --> 00:22:30.400 the court of Houston, Texas BMC Software 447 00:22:30.400 --> 00:22:33.900 had a case against IBM because IBM 448 00:22:33.900 --> 00:22:36.800 store one big client American Telephone 449 00:22:36.800 --> 00:22:39.800 and Telegraph, this is quite a big one. Now. The 450 00:22:39.800 --> 00:22:43.100 Houston Court said this is absolutely illegal practice 451 00:22:42.100 --> 00:22:45.400 and IBM has to pay a fine of 452 00:22:45.400 --> 00:22:48.200 1.6 billion dollars what happens to 453 00:22:48.200 --> 00:22:51.500 stock price of IBM not much. But what happened 454 00:22:51.500 --> 00:22:55.100 to the stock price of kinville minus 11% 455 00:22:54.100 --> 00:22:57.600 why because Kindle might 456 00:22:57.600 --> 00:23:00.400 be involved in the dispute and in charge 457 00:23:00.400 --> 00:23:02.400 of paying the bill so clearly 458 00:23:02.900 --> 00:23:05.400 Is not very nice for Kindle as far 459 00:23:05.400 --> 00:23:08.000 as IBM is concerned life is absolutely great. 460 00:23:08.800 --> 00:23:11.300 If you look at the evolution of the stock price of 461 00:23:11.300 --> 00:23:15.600 IBM since the spin-off first mechanically 462 00:23:14.600 --> 00:23:17.400 the stock price of IBM is 463 00:23:17.400 --> 00:23:20.400 down. Why because basically you take 464 00:23:20.400 --> 00:23:23.400 some value of the campaign and it is out of the 465 00:23:23.400 --> 00:23:27.500 company 50 dollars per share presumably and 466 00:23:27.500 --> 00:23:30.300 divided by five. It is about $10 per share. 467 00:23:30.300 --> 00:23:33.200 So the stock price is down by 10 dollars mechanically. 468 00:23:34.200 --> 00:23:37.400 And interestingly a few weeks later back to 469 00:23:37.400 --> 00:23:40.200 the initial position. If you look at the evolution of 470 00:23:40.200 --> 00:23:43.500 the NASDAQ IBM of z-correlated and then it's 471 00:23:43.500 --> 00:23:46.900 a correlated again with a NASDAQ as if nothing happened 472 00:23:46.900 --> 00:23:49.300 then IBM and the 473 00:23:49.300 --> 00:23:53.000 nice Dax, they follow the same path and interestingly what happens 474 00:23:52.400 --> 00:23:55.700 in the beginning of April. NASDAQ is 475 00:23:55.700 --> 00:23:58.500 significantly down and IBM is 476 00:23:58.500 --> 00:24:02.200 doing well. So you understand that the company has 477 00:24:01.200 --> 00:24:05.700 a reputation of resilience stability 478 00:24:04.700 --> 00:24:07.600 and probably getting rid 479 00:24:07.600 --> 00:24:10.800 of Kindred is quite good news for the company after the 480 00:24:10.800 --> 00:24:12.200 announcement of the first quarter. 481 00:24:13.200 --> 00:24:16.400 Now what about the return on investment? If you are an IBM 482 00:24:16.400 --> 00:24:19.300 shareholder imagine that on the 20th of October 483 00:24:19.300 --> 00:24:22.400 you hold five IBM shares. 484 00:24:23.100 --> 00:24:26.000 The wells is five times the stock price the stock 485 00:24:26.200 --> 00:24:30.200 prices by hand 35 times. It's 600 and 675. Now 486 00:24:29.200 --> 00:24:32.300 you receive one kind real share 487 00:24:32.300 --> 00:24:35.000 which is supposedly worth $50, 488 00:24:35.700 --> 00:24:38.700 but you still have your five IBM shares and you're 489 00:24:38.700 --> 00:24:40.000 worse has not changed. 490 00:24:40.900 --> 00:24:43.500 So in October 21, the IBM share 491 00:24:43.500 --> 00:24:46.500 is down to 122. It's down 492 00:24:46.500 --> 00:24:49.800 by about $10, which is fifty dollars 493 00:24:49.800 --> 00:24:52.700 Kindle divided by five one can 494 00:24:52.700 --> 00:24:55.700 really share for five IBM shares. So your 495 00:24:55.700 --> 00:24:58.300 new quotes Wells is five times 496 00:24:58.300 --> 00:25:01.400 a stock price for IBM plus the value of 497 00:25:01.400 --> 00:25:04.800 Kindred which is supposedly again 15. It's 498 00:25:04.800 --> 00:25:07.000 about 660 quite the same. 499 00:25:07.900 --> 00:25:10.500 But again, it's quite the same if the Kinder 500 00:25:10.500 --> 00:25:13.500 is stock price is supposedly remaining at its initial 501 00:25:13.500 --> 00:25:17.100 value of $50, which is absolutely not the case. Now, 502 00:25:16.100 --> 00:25:19.500 if you look at the return investment for an 503 00:25:19.500 --> 00:25:22.300 IBM shareholders today, not shortly after 504 00:25:22.300 --> 00:25:26.100 the listing of Kindle. You still have your five IBM 505 00:25:25.100 --> 00:25:28.800 shares imagine that you capture. What is 506 00:25:28.800 --> 00:25:31.900 the stock price of IBM today 141 507 00:25:31.900 --> 00:25:34.500 multiplied by 5 plus 11 is 508 00:25:34.500 --> 00:25:37.800 716 now life 509 00:25:37.800 --> 00:25:40.400 is okay for the IBM shareholders you remember 510 00:25:40.400 --> 00:25:40.600 you 511 00:25:40.900 --> 00:25:43.900 Hold five IBM shares your wealth 512 00:25:43.900 --> 00:25:46.900 is 675. Now your wealthy 513 00:25:46.900 --> 00:25:49.500 716 in the meantime, 514 00:25:49.500 --> 00:25:52.800 the NASDAQ has collapsed and so you understand that kind 515 00:25:52.800 --> 00:25:55.900 real is a little bit quote marginal in 516 00:25:55.900 --> 00:25:58.800 the calculation of the return investment for the IBM 517 00:25:58.800 --> 00:26:01.800 shareholders. The good news for IBM 518 00:26:01.800 --> 00:26:04.200 is at the company demonstrated that 519 00:26:04.200 --> 00:26:07.900 it was quite resilient. When the 520 00:26:07.900 --> 00:26:11.100 NASDAQ was dropping now, your 521 00:26:10.100 --> 00:26:13.400 IBM Kindra is out of the picture. 522 00:26:13.400 --> 00:26:16.900 It's completely marginal. It's no more problem and 523 00:26:16.900 --> 00:26:19.200 you can concentrate on the development of 524 00:26:19.200 --> 00:26:22.900 the cloud and the growth is supposedly back 525 00:26:22.900 --> 00:26:23.700 for the company. 526 00:26:24.800 --> 00:26:27.400 Now it was a case but a very 527 00:26:27.400 --> 00:26:31.200 specific case I observed plenty of spin-offs 528 00:26:30.200 --> 00:26:33.700 and I will have the opportunity to describe a 529 00:26:33.700 --> 00:26:37.300 few of them later in the future of the academy. Now, 530 00:26:36.300 --> 00:26:39.600 let me tell you there are as many 531 00:26:39.600 --> 00:26:43.300 value creation patterns as spin-off 532 00:26:42.300 --> 00:26:45.700 situations every case 533 00:26:45.700 --> 00:26:48.900 is quite specific and extremely interesting 534 00:26:48.900 --> 00:26:51.500 to observe which we'll do a little 535 00:26:51.500 --> 00:26:52.200 bit in the future. 536 00:26:53.600 --> 00:26:54.200 Thank you very much.