French multinational IT services company Atos plans to split in two, just as IBM spun off its legacy-focused managed infrastructure services business to form Kyndryl in November 2021.
It is a gesture of Ave Maria for Atos. CEO Rodolphe Belmer, who was appointed on January 1, 2022 to lead the company through the latest in a series of transformations, has appointed two deputy CEOs to lead the two new businesses and has stepped down, effective by end of September. .
Clients will hardly have gotten used to the latest upheaval, in February, which saw Atos reorganize its business into three business lines. The most important of the three lines, the “technological foundations”, regroups what Atos calls its “mature” activities: data centers and hosting; the digital workplace; unified communication and collaboration; and business process outsourcing. This business line accounted for just over half of Atos’ revenue in 2021. The other two business lines are “digital”, which includes digital transformation and decarbonization services, and “the big data and security,” which focuses on research-intensive activities in cybersecurity, high-performance and edge computing, and mission-critical systems.
Atos and its customers, including hotel chain Accor, electronics supplier RS Components and telecom operator Telefonica, could learn from how IBM handled its spin-off Kyndryl, as there are similarities between the two. . Like IBM, Atos has a supercomputing business, operates its own data centers and offers IT software, consulting and services, albeit on a smaller scale. Atos has about a third of the workforce of IBM, which before the split that gave birth to Kyndryl employed 350,000 people. IBM still has 282,000 employees, operating in 171 countries, while Atos employs 111,000, providing IT services in 71 countries. These staff are also less productive: while IBM reported revenue of $57 billion in 2021 (or $200,000 per head), Atos revenue was only $12 billion. dollars ($108,000 per head).
Legacy losses
IBM was still broadly profitable when it was spun off, having made $5.7 billion in net income in 2021, and saw the move as a way to free its fast-growing cloud business from growing legacy and maintenance businesses. slower. Atos, however, is in much worse shape: it lost around $3 billion in 2021, and its legacy (or “mature”) businesses aren’t just growing slowly, they’re actually shrinking: the Technology Foundations shrank in size by about 12% last year and had a negative operating margin.
Unlike IBM, which created a company about a quarter of its overall size, Atos plans to split into two nearly equal halves.
One of those halves will combine the company’s faster-growing digital and big data and security (BDS) businesses, and spin off from its parent company as Evidian, which Atos already uses for its identity and access management products. It will be led by Philippe Oliva, who joined in April 2022 from Eutelsat (also Belmer’s former employer). Prior to that, Oliva spent nearly two decades at IBM, much of it managing cloud and hybrid services.
The other half, made up of the company’s technology foundations business line, will retain the Atos name. To distinguish this future smaller Atos entity today, the company calls it TFCo for now. It has been led since the February reorganization by Atos veteran Nourdine Bihmane. He has been with the company since 2001, just after the Atos name first appeared, although the company’s origins go back much further, with at least part of its business going back over a century. .
Atos was born from the successive mergers of a multitude of European IT services companies, including Philips Communications & Processing Services, BSO/Origin, Cegos, Sliga and Schlumberger Sema, some of which were founded in the 1960s or 1970s. In 2014, he purchased Bull, a French mainframe and supercomputer founded in 1931. Bull was founded to compete with IBM, manufacturing and selling tabulating machines patented by their inventor as early as 1919 to rival those of Hollerith, the company that would become IBM.
If Atos had hoped that the plan to split the company in two would cause the share price to fall, it was deeply disappointed. On June 14, the day of the announcement, it fell around 25% and has since fallen, suggesting that investors believe the company will be no more profitable or successful in two parts than in one.
CIO Concerns
To convince investors – and the CIOs it serves – Atos will have to solve a number of problems.
Service continuity is likely to be one: Although the company is splitting on the model of a reorganization already carried out in February 2022, the split into two companies will force Atos to duplicate central services such as invoicing or the systems used by employees to communicate with customers.
IBM helped ease customer fears by appointing its spin-off management team long before naming the new company. Atos chose to name its future CEOs, Bihmane and Oliva, on the same day it named future companies, Atos and Evidian, but many other senior positions will have been settled during the February reorganization. The two halves, however, will each need their own CFO and other senior executives they didn’t need under the same umbrella.
Finding efficiencies and new business to revive TFCo’s legacy hosting and outsourcing business as the world plunges into recession will be another challenge. He tried throughout the COVID pandemic, but to no avail.
Bihmane has already laid out its strategy to restore TFCo’s growth, profitability and cash flow by 2026.
The first step, Atos said, will be to rationalize the company’s existing business portfolio, exit non-strategic businesses and “recover or exit negative margin accounts.” Customers will have to be careful here: even if Atos decides to continue to offer what they buy, CIOs who get good deals will probably be asked to pay more or find another supplier.
The second stage is more likely to affect TFCo’s 48,000 employees as the company attempts to “reset” its cost structure through offshoring (moving jobs to where they are cheapest), “l ‘adjustment of the age pyramid’ (farewell experienced but expensive employees), ‘reduce third-party expenses’ (lay off expensive contractors) and ‘consolidate data centers and facilities to generate cost savings’ (eliminate duplicate roles).
In the third stage, the “rebound”, Atos plans to pivot towards growth by developing new offers and investing in its sales capacities.
Kyndryl started out with similar ambitions to transform its legacy business, but its first full quarter as a standalone company has been tough. In the three months to March 21, 2022, he saw his revenue decline 3% year-on-year at constant currency (7% in real terms), and he forecast revenue for the year to March 31, 2023 would also be 3% lower. than the previous year. There was a silver lining, however: Kyndryl managed to halve its net loss for the quarter ending March 31 from a year earlier, and forecast a slight pretax profit for the next fiscal year.
Atos expects TFCo’s revenue to also continue to decline, falling from €5.0 billion ($5.3 billion) in 2022 to a minimum of €4.1 billion in 2024 and 2025 before returning to normal. growth in 2026.
Things could be easier for Evidian, the more forward-looking part of Atos’ proposed split. It has grown organically at 5% year-over-year – a pace that is expected to increase to 7% post-split – with an operating margin of nearly 8%, which is expected to reach 12% by 2026. Its stock in the trade, cybersecurity, is always in demand, and with energy prices soaring, another of its businesses, consulting on reducing IT energy consumption and carbon emissions, is much sought after.
