Once an IBMer …

I left IBM a year ago – but have always held the company in high esteem . A lot of what I know today about the industry is stuff I learned in my time there . And I definitely had more good days than bad days there . I still own a tiny little bit of stock in IBM , and some of my best friends and mentors work there . Where I work now , IBM is both a partner and a competitor . And for all those reasons – I keep a close eye on IBM . As always – I am posting this as my personal opinions , not that of my employer .

It was pretty disturbing for me to read that IBM is planning another round of layoffs in 2014 and they have kept aside a billion dollars for that, like they did in 2013 . Having several friends who work there – it is pretty sad for me when I see IBM in such trouble .

When I joined IBM, I think the share price was a little less than $70 . And every year it kept increasing and at some point went well over $200 and now it is about $182 or so . So over the long term, they did pretty well and many employees and investors did well as a result . While there were always some unhappy employees – for the most part , IBM did ok .

IBM is unapologetically capitalist in nature . By the time I joined – there was no pension plan or life time employment type things . And the company was expanding rapidly outside USA. If you look at IBM as an American company , it is kind of hard to see it in a good light . But if you think of them as a global company – it made sense to make use of cheaper labor, better access to other markets and so on .

IBM , in Sam Palmisano’s time made the promise to investors that it will hit $20/share as EPS by 2020. And EPS has been on an upward trend through every quarter I think , irrespective of top line growth.

And then Sam handed over the reins of IBM to Ginnie Rommety . She had already managed services and sales for him, and was supremely qualified for the job . She also grew up the ranks at IBM and knew the company inside out . I thought it was a great decision to make her the CEO and Chairman . It was a pretty smooth transition too .

Sam not only grew the share price and EPS , he also did some savvy stuff like selling off the low margin PC division , investing significantly in IBM Watson etc . So all things considered – it seems Sam set up Ginnie for a decade of success . And Ginnie told the world that she is executing on current strategy .

IBM is laser focused on that EPS goal , and uses all possible levers . There are mainly just four things –
1increase revenue
2.decrease cost
3.buy back shares
4. show investment commitment to future revenues .

The latter three levers were the ones IBM seems to have played best in recent past . In Sam’s time – this was amply rewarded by the capital markets . But in Ginnie’s time – Market is punishing IBM for playing exactly those same levers . Not growing revenue is what is hurting IBM big time .

Selling the low margin part of hardware business to Lenovo seems like a good idea – but probably something the market has already factored in . I have mixed feelings of this sale – I have friends among the people in that business , and I can only wish them the best . But stemming that bleeding profit is good financially for the company .

All that being said – one question remains in my mind . Did Ginnie do the right thing by telling investors that she will follow Sam’s strategy and not chart her own course ?

Street likes predictability more than anything . So if a CEO resets expectations, market will usually give the company more time as long as the plan and time line is communicated well . In much worse situation, HP CEO asked for more time and the Market didn’t punish HP stock for that . If anything I felt HP CEO should have asked for even more time to steady her ship .

So if Ginnie had said “I am playing a long game – so I am going to extend the time frame of EPS roadmap” , would IBM stock have been punished more than the value it lost so far ?

Market is used to not seeing profits – companies like Salesforce and Amazon have gotten the market to believe that revenue/bookings growth should be rewarded even in absence of real profits . Yet, IBM will get punished for showing real profits and growing EPS but not revenue growth . I guess that is why capital markets have that mystic aura 🙂

Or maybe market is not that irrational – and IBM can’t cut costs forever and reach their promised glory . Like every large matrix organization, I am sure IBM has opportunities to cut costs and get leaner – but every time they do that, it does a lot of harm to its employee morale and that is not easy to repair . It is a hard choice to make .

Competitive landscape doesn’t make it easy either . IBM is an amazing technology company and has a habit of making long term bets – like Watson. But a mothership cannot always easily turn on a dime .

Amazon is the Walmart of infrastructure providers with its everyday low price model . That is not IBM’s game . IBM needs to play up its “value added services make us better than Amazon” card really well to see if it works . While I don’t under estimate Mr Bezos, I actually think IBM can out do Amazon since it has staying power in abundance . Soft layer acquisition is a good indication of IBM doubling down . Also , while intel based HW is out – IBM still has Z and P business which can provide manufacturing expertise for their cloud . IBM microelectronics has cutting edge expertise on semiconductors too. But data centers are a capital intensive business and IBM will need to get to the efficiency of the consumer company data centers at some point . Not at all easy , but eminently doable in my opinion .

I am pretty positive that IBM will do well again . I have three main reasons for that

1. Before my time at IBM, they had a near death experience . They know how bad it can get if things don’t go their way . But they survived that and thrived . That is invaluable experience that they can use again

2. IBM has invested a lot in leadership development . People like Ginnie and Steve Mills are some of the best in the industry and they have plenty of leadership bench . I always bet of good leaders and I would be shocked if these people can’t pull it off . It’s not just the top leaders – they have some very bright engineers and an amazingly well trained sales force with great customer relations . This is a people business first and foremost .

3. IBM has continued to invest in research through all kinds of economies . They have more patents most years than other companies . That kind of IP is invaluable in the long term – and not easy for someone else to overtake them

Good luck IBM – I wish you nothing but the best . But in the few times that I have to compete with them – I will try everything possible to kick their butt . That is how IBM trained me 🙂