IBM recently abandoned its 2015 profit target of $20 per share, having made only $10.76 in the first three quarters of this year. Its share price fell as a result to a current $162, against a high for the year of nearly $200 and an average price for Berkshire's holding of $170 per share.
By coincidence, when Mr Buffett was buying Berkshire's stake in IBM, we were looking at it for the Fundsmith Equity fund and rejected it. Why?
The computer services giant had just delivered its "IBM 2015 Roadmap" in May 2010 via a PowerPoint presentation. My defensive instincts are immediately aroused when someone uses the term "roadmap" unless they are in a motor vehicle. "Plan" is a perfectly good and much less pretentious term.
This "roadmap" was intended to show how IBM would grow its 2010 profits of $11.52 per share to $20 by 2015. ...
Acquisitions, cost cutting and share buy-backs are not a particularly high-quality source of growth. The cost cutting and share buy-backs are certainly finite – you can't cut costs and shrink your business to growth, other than growth in earnings per share, which Mr Buffett had already correctly rejected as a useful measure of value creation or performance. ...
The share buy-back "bridge" was particularly worrying. The slides show it as $50bn of planned share repurchases. How could anyone be sure that they will repurchase shares over the coming years, let alone such a vast quantity? After all, what will the share price be? If the shares are trading above their intrinsic value, a share repurchase will destroy value, other than for those shareholders who exit by taking the opportunity to sell.
So, what's going on with Big Blue? The troubled started, in large part, thanks to a sharp sell-off following a dismal third-quarter earnings report. IBM reported adjusted earnings of $3.68, well short of estimates which averaged $4.32. In its quarterly release, the tech giant noted, "A marked slowdown in September in client buying behavior, and our results also point to the unprecedented pace of change in our industry." That weak performance prompted management to jettison its long-held target of $20 in earnings per share in 2015. ...
Over the last three years, the Dow has risen 47% while IBM has lost 15%. ...
Where's all the money going? The $20 EPS goal for 2015 wasn't just predicated on sales growth. IBM has been implementing a massive share buyback program that has reduced share count from 1.16 billion at the end of 2011 to 990 million today, accounting for over $30 billion in repurchases. ...
Despite IBM's woes over the last three years, it has not increased spending on Research & Development to boost its growth endeavors, and it has actually spent more on dividends and share buybacks than it has brought in in free cash flow. Last year, expenditures on dividends and buybacks nearly equaled operating cash flow. At the same time, its debt burden has jumped $10 billion to help fund the rampant buybacks.
But buybacks are a luxury, not a necessity, and for a company to be spending so much on them, especially a technology company, seems to signal an unwillingness to invest in itself and its opportunities, which are necessary for growth. Share buybacks can be useful if shares are undervalued and the underlying business is strong, but for a weak business it does nothing to improve competitiveness. It's the laziest way to spend profits. ...
And its habit of setting those long-term goals is actually what got the company into trouble in the first place. IBM indeed set a goal for 2015, at $20 EPS, but instead of growing its business to try to meet that goal, it instead took a short cut with buybacks. Now, it finds itself in a much weaker competitive position, and with declining revenue and profits.
If you take out the last fourteen years of goodwill, it turns out the stock isn't worth much today from a shareholder's equity perspective, and the trend is not positive. I truly do not want to be the last person holding that last share of IBM stock.
Unfortunately, IBM is just continuing Louis V. Gerstner's 1999 Roadmap of prioritizing the legal and financially expedient over the judicious and ethical. Shareholders may soon experience what IBM's employee-owners have been experiencing for a decade and a half. The last thirteen years has prioritized the appearance of financial success over long-term corporate survival. ...
People aren't resources you can nail to the floor. IBM employee-owner morale is terrible and the people that are acquired aren't sticking around. In many cases, after the initial acquisition grace period — and the retention bonus has been paid — they are leaving or being resourced just like any other IBM employee. I referred to this in my book as two conflicting strategies at war with each other: expertise acquired at a premium is set adrift by a resource action. In the days when manufacturing of hard assets was critical to IBM, getting control of the physical asset was important; today, the true asset is in the minds of the acquired employee-owners. If IBM is not retaining and integrating a critical percentage of the 142 companies' employees it has acquired, it should consider taking an impairment. The knowledge, energy, inventiveness and dedication that IBM purchased at a 55.6%+ premium is now gone. ...
IBM impacts an acquired product. Usually the impact is positive, but other times it is negative. IBM will taint an acquisition's successful product with its own goals and strategic direction. It acquires a product that was usually easily priced, inexpensive, sometimes fit on a thumb drive, had a time-to-customer-value measured in hours, and outstanding installation and ease-of-use characteristics; it then exchanges that for a product that is more secure, hard to price, costly, and blue-washed. Blue washing — an internal IBM process — brings an acquired product up to IBM standards: hard to install because of the supporting product infrastructures required, impossible to even download easily from the Internet, and installation, usability and time-to-value characteristics that are hard to describe until experienced. It takes IBM's best product managers to retain a startup's customers, and IBM's best product managers have their hands tied by IBM finance and development teams spread out across the globe. ...
I cannot see behind the closed doors of the corporate board room. If Rometty is fighting to get IBM culturally back on track, it will take years, but the employee-owners and customers need to see movement. Shareholders are only now experiencing what IBM's employee-owners have been seeing for a decade and a half: IBM left the path of right over might for wearisome roadmaps based on might over right. It started with Gerstner, and was reinforced by Sam Palmisano. Ginni Rometty should change the course.
While its possible that value-minded investors may find IBM intriguing, it seems likely that this may be the beginning of a much deeper slide. Here are three reasons why shares of IBM should be avoided-not embraced.
Although IBM has blamed a rapidly shifting market, its underperformance appears to be the byproduct of a mistaken corporate strategy finally coming home to roost. Rather than attempt to generate real organic growth, IBM has spent the last few years engaged in financial engineering, leveraging its balance sheet to deliver on its long-standing commitment to an earnings per share figure of $20 by next year.
CEO Ginni Rometty inherited that target from her predecessor, but has done little to alter IBM's strategy. Big Blue has paid out a steady dividend, but shares are down more than 10% since Rometty took over at the beginning of 2012. IBM's recent underperformance has raised the specter of potential activist intervention — Cantor Fitzgerald's Brian White believes the company could come under fire if it cannot right the ship next year. Should an activist take a stake in the company, replacing Rometty could be among the top priorities.
The 3-to-2 ruling overturned a decision made in 2007, when Republicans held a majority on the board, that had forbidden such use of email.
Calling that ruling “clearly incorrect,” the current majority noted how technology had transformed daily habits. “The workplace is ‘uniquely appropriate’ and ‘the natural gathering place’ for such communications,” the board wrote, “and the use of email as a common form of workplace communication has expanded dramatically in recent years.”
The expected congressional action to allow previously promised private-sector pensions to be cut is another sign that decades-old assurances that workers were given about retirement income are rapidly fading. ...
Other unions and retiree groups, including the AARP, have denounced the plan as a betrayal of a promise, enshrined in federal law for four decades, that vested pension benefits would not be cut.
The retirees whose pensions are at stake are mostly blue-collar workers, including mechanics, truckers and construction workers, who participate in what are known as multi-employer pension plans. ...
For many workers, the medicine is bitter. The nonprofit Pension Rights Center warns that some workers could see their retirement checks cut by as much as 60%. ...
"Let's measure this against other things the government has done," Buffenbarger said. "They bailed out Wall Street so those guys can keep their yachts. But we can't come up with the equivalent to bring solvency to the entire nation's pension systems?"
Wall Street banks, automakers and insurance giants got bailouts during the economic meltdown that started in 2008. But when it comes to the pensions of retired truck drivers, construction workers and mine workers, it seems that enough is enough.
The $1.1 trillion omnibus spending bill moving through Congress this week adopts “Solutions Not Bailouts,” a plan to shore up struggling multiemployer pension funds—traditional defined benefit plans jointly funded by groups of employers in industries like construction, trucking, mining and food retailing.
A bailout, it is not. The centerpiece is a provision that would open the door to cutting current beneficiaries’ benefits, a retirement policy taboo and a potential disaster for retirees on fixed incomes. ...
The fix moving through Congress would revise the Employee Retirement Income Security Act (ERISA) to grant plan trustees broad powers to cut retired workers’ benefits if they can show that would prolong the life of the plan. That would mark a major change from current law, which calls for retirees to be paid full benefits unless plan assets are exhausted; then, the PBGC steps in to pay benefits, albeit at a much lower level. The bill also would increase PBGC premiums paid by sponsors, from $13 to $26 per year. ...
The big problem here is that the plan fails to put retirees at the head of the line for protection. When changes of this type must be made, they should be phased in over a long period of time, giving workers time to adjust their plans before retirement. For example, the Social Security benefit cuts enacted in 1983 were phased in over 20 years and didn’t start kicking in until 1990.
“It’s a cruel irony that in the year we’re celebrating the 40th anniversary year of ERISA, Congress is trying to reverse its most significant protections,” said Karen Friedman, executive vice president of the Pension Rights Center (PRC), an advocacy group that has been battling with NCCMP on some of the proposed changes to retired workers’ benefits.
Friedman’s organization, AARP and other advocates reject the idea that solvency problems 10 to 15 years away require such severe measures. They have pushed alternative approaches to the problem; one that is included in the deal, DeFrehn says, is an increase in PBGC premiums paid by sponsors, from $13 to $26 per year. Advocates also have called for other new revenue sources, such as low-interest loans to PBGC by the once-bailed-out big banks and investment firms.
There are no easy answers here. But cutting the benefits of today’s retirees should be the last solution we try—not the first.
Pros: Wide variety of product offerings.
Cons: Bureaucratic, slow to get pricing approved for clients, offerings are rigid.
Advice to Senior Management: Cut the countless unnecessary levels of management...many levels of VPs and GMs who add nothing. Many don't even manage people...pay the sales teams better; the best sales people are leaving in droves to other more growth oriented companies who have a clue how to treat people. There is now zero respect for the individual and each year top management thinks of additional ways to cut more off the backs of their workforce and pad their bonuses.
Pros: Flexible work environment with great work/life balance; management generally reasonable to provide structure and guidance; people are capable but no that many recent graduates.
Cons: Working with remote team is typical and can be challenging; management is at different timezone to influence real time decisions; too many processes to be efficient. Not tons of opportunity for growth. Minimal salary increase for the last 3 years.
Advice to Senior Management: Focus on employee growth opportunity otherwise company will lose star employee. As much as possible, use local management for teams and reduce bureaucratic process as much as possible.
Pros: IBM still has lots of resources.
Cons: Upper management is too focused on short-term results and shareholder value. IBM doesn't care about its customers (other than trying to figure out how to extract more money from them) or employees (other than exploiting them more efficiently); only about the bottom line. IBM acquires 4 or 5 companies every single week, which might help the finance statements but does nothing to create new products or services.
Employee morale is really bad and getting worse. Employees must work long hours with little hope of real reward (other than maybe not being laid off). The performance evaluation system is hopelessly broken and downright insulting. Upper management demands absolute integrity and loyalty from employees while demonstrating none of these qualities themselves.
Advice to Senior Management: Focus on creating and providing value to customers rather than accounting and marketing tricks.
Pros: Salary is around the average. Company allows you to grow if you work to it. Lots of good things in IT happens at IBM, mainly cloud, mobile, database, etc. It is definitely a place to stay in touch with very recent technologies. Benefits are good too. Definitely home office is a major benefit to me. It is easy to find experts for any IT area, like people that wrote the books you read at school work for IBM. This is awesome!
Cons: Due to its big size, there are tons of process even for small things. You are required to run into education courses not related to your day-to-day job. Even though there is space to grow, things are VERY slow. Appraisal process is like a pain in the *** and the results are not always clear.
Advice to Senior Management: IBM should start thinking to get close to end users, not only companies. We should have products like the ones Google or Apple have. The general public has to recon and think about IBM as a big IT solution provider not only for their business, but for people as well. Getting close to people, will make us get close to their business.
Pros: Great network, intelligent environment. Everyone working loved to help others and the company had a direct unified mission.
Cons: Structured hierarchy, long and difficult process to move up. Office culture was a little outdated. Mostly closed off rooms and hard to meet new people.
Advice to Senior Management: Make the company more interesting to work at for young people. Right now, IBM is still has that old corporate feel. Most offices are located outside cities which make it an unattractive place to work for millennials.
Pros: Incredible amount of resources to access, whether it be mentorship or a masters degree, IBM has got your back. This company is focused on building your skills, so it is a great launching pad for people early in their career and lacking experience.
For people are skilled enough in what they do to work from home, IBM is a dream come true.
Cons: IBM doesn't perform cost of living adjustments. In comparison to other Bay Area competition the pay is dismal. However if you move out of the Bay Area, to say Texas where the taxes are low and the living is cheap, you will be making more money than the local competitors.
Aside from compensation: The company spirit is nowhere near the "Silicon Valley energy" I've seen in other tech firms.
Advice to Senior Management: Undoubtedly the transition has been tough for managers and has been a source of the slight social breakdown within IBM's teams. (Another source has been from the increased spreading out of teams across multiple sites and states). A big effort needs to be made in the realm of social engagement especially if they are expected to keep their recent college graduates.
My out of pocket expenses for medical/dental services are pretty low, though some prescriptions are expensive. -Survivor-
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