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About that $1b... IBM says Watson Health assets fetched $230m in pre-tax profits

Unit was supposed to transform oncology yet never turned a profit, ended up in hands of private equity

IBM has confirmed it made a few hundred million on the $1 billion sale of the healthcare data and analytics assets housed by its Watson Health unit.

When the tech was flogged off to private equity firm Francisco Partners in January, it was said to be valued at a cool $1 billion. In an SEC 10-Q filing on Monday, Big Blue disclosed it had indeed received a cash payment of $1,065 million.

However, during IBM's latest earnings call, CFO Jim Kavanaugh told Wall Street analysts the sale, which completed in the second quarter, amounted to a pre-tax profit of about a quarter of the headline figure:

At the end of June, we closed on the divestiture of our healthcare software assets, generating a pre-tax gain of about $230 million in the period.

IBM didn't realize the full benefit of the sale price because it had to account for expenses. "Mitigating that benefit to our overall profit results, we took charges to address stranded costs associated with the divestiture and absorbed operating losses related to the health business, together, [of] over $75 million," he added.

The Watson Health business was launched in 2015, and IBM subsequently spent circa $4 billion on related acquisitions to expand revenues and its tech capabilities, yet profits eluded the unit.

Last month, Big Blue chairman and CEO Arvind Krishna confirmed he expunged Watson Health's assets because his organization didn't have the necessary vertical expertise to make it fly.

"It's a question of verticals versus horizontals. We believe that we are better positioned to take these technologies. We will always have an industry lens but through our consulting team. We want to work on technologies that are horizontal across industries," he told an audience at Bernstein's 38th Annual Strategic Decisions Conference.

"Verticals should belong to people who really have all of the domain expertise, they have credibility in that vertical. And so I think that the healthcare companies, people in medical devices, they have the credibility to carry out how AI is applied to health in depth," Krishna added.

He said he was convinced that AI applied to healthcare and other verticals will be a massive market in a decade or two and the winners will be the ones with a deep domain expertise.

Required will be doctors and nurses that talk to the buyers of Watson Health. "That's not the IBM go-to-market field force, so there's a misalignment." ®

Editor's note: This article was updated to make clear that though IBM ultimately recorded just a $230 million pre-tax gain from the sale, it did receive a billion dollars in cash from private equity. We're happy to clarify the situation.

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